Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Rewriting the Rules for Gold Miners
Transcript
- Lucas: So Luna, I've been staring at the numbers all week, and I keep coming back to one that just doesn't make sense on the surface. The gold miners ETF, the GDX, is up over sixteen percent in just five days. Gold itself is up nearly five percent. That's a massive divergence. Luna: That is a huge move. I mean, gold miners are known for being volatile, but sixteen percent in a week? That's not just volatility, that's a statement. What's driving it? Lucas: Well, part of it is the macro backdrop. We're sitting here on August 24th, 2026, with inflation running hot — CPI at 332.8, still creeping up — and real GDP growth down to just one and a half percent annualized. That's the textbook definition of stagflation, and gold is supposed to shine in that environment. But the miners are amplifying that move because they're essentially a leveraged bet on the gold price. Luna: Leveraged how? I mean, they're not using financial leverage in the same way a bank would, right? Lucas: Right, it's operational leverage. Think about it this way: a gold miner has fixed costs — the mine, the equipment, the salaries. When gold prices rise, those costs stay roughly the same, so the revenue increase goes almost entirely to the bottom line. That's why a five percent move in gold can translate into a fifteen or twenty percent move in miner earnings, and the stock market prices that in. Luna: So it's like the miners are a derivative of gold, in a way. But that also means they're riskier. If gold drops, they fall harder. Lucas: Exactly, and that's the flip side. But right now, the market is betting that gold has more room to run. The ten-year breakeven inflation rate is at two point three four percent, which suggests investors expect inflation to stay elevated. And with the Fed in a tough spot — they can't hike too aggressively without crushing growth — real rates are going to stay low, which is historically bullish for gold. Luna: But Lucas, we've seen this movie before. In the late seventies, gold went on a huge run, and then it crashed spectacularly in 1980. Are we setting ourselves up for a similar bust? Lucas: That's the question, isn't it? And it's worth remembering that the miners didn't do as well as the metal in the early stages of the 1970s because their costs were rising just as fast. It wasn't until the late seventies, when gold really took off, that miners started to outperform. So the fact that miners are surging now could be a sign that the market thinks we're entering the late-stage of this inflationary cycle. Luna: So you're saying the miners are telling us something about the longevity of this gold rally. That's a pretty nuanced take. Lucas: I think so. And there's another factor here that's different from the 1970s: capital discipline. After the last mining boom and bust, the big miners really tightened up their spending. They're not pouring money into new projects like they did back then. They're returning cash to shareholders through dividends and buybacks. That changes the investment case. Luna: But doesn't that mean they're not growing? If they're not investing in new mines, production is going to stay flat, and the only way to grow earnings is if gold prices keep rising. Lucas: Exactly, and that's the catch. In a way, the miners have become a pure play on the gold price. They've given up the option to grow organically. So if gold stalls, they'll underperform. But if gold keeps climbing, they'll be the ones to benefit the most. Luna: I guess that's why the GDX is up so much — the market is pricing in a continued rally. But it also makes them a more fragile investment. If inflation starts to cool, they could get hit hard. Lucas: Right, and that's the risk. The market is essentially making a bet on the path of inflation. But here's the thing: it's not just about inflation. It's about the Fed's reaction function. If they signal that they're going to tolerate higher inflation for longer to support growth, that's great for gold. But if they pivot and get hawkish, gold could give back some of these gains. Luna: And speaking of the Fed, there's been a lot of talk about Bessent's bond gambit and whether it's actually working. Do you think that's playing into the gold trade? Lucas: It's certainly part of the backdrop. There was a headline just today that the Treasury could tap up to a trillion dollars in its general account to fund bond buybacks. That's a massive amount of liquidity that could be injected into the market. And the initial reaction has been to worry that it's inflationary, which you see in the gold price. Luna: So the market is saying that Bessent's actions are actually adding to the stagflation risk, not reducing it. Lucas: That seems to be the read. And that's why gold is responding. The miners are just the most volatile way to play that theme. But it's a high-stakes game. If the bond buybacks actually calm the market and inflation expectations stay anchored, then gold could run out of steam. Luna: So what should an investor do? Is it too late to get in, or is there still room to run? Lucas: Well, I'm not in the business of giving investment advice, but I can lay out the scenarios. If you believe that we're in a prolonged stagflation like the 1970s, then gold and miners probably have more upside. But you have to be prepared for volatility. The miners are not a buy and hold asset; they're a trading vehicle for a specific macro view. Luna: So it's a conviction trade, not a portfolio staple. Lucas: Exactly. And one more thing to consider: the miners are also facing cost inflation themselves. Energy costs, labor costs, equipment costs — all of that is rising. So even if gold goes up, the miners' margins might not expand as much as you'd think if their costs are climbing too. Luna: Right, that's the thing people forget. It's not just about the price of gold; it's about the cost of digging it out of the ground. And in a stagflation environment, those costs are going up. Lucas: Exactly. So the earnings quality matters. Some miners are better positioned than others, with lower all-in sustaining costs. That's the metric to watch. If you're looking at miners, you want to focus on the ones that can maintain margins even if gold stalls. Luna: So let's talk about that. How do the current valuations look? Are the miners priced for perfection? Lucas: Well, the GDX is up big, so the price to earnings ratios have expanded. But you have to remember that forward earnings are expected to grow if gold stays high. The market is pricing in a lot of optimism. If gold drops even ten percent, we could see a significant correction in the miners. Luna: That's a scary thought. But I guess that's the nature of the beast. You buy miners for the upside, but you have to accept the downside risk. Lucas: Yeah. And that's why I think it's important to look at the miners as a tactical play, not a core holding. Unless you're really bullish on gold for the long haul, you might want to consider a smaller position or use options to manage risk. Luna: Options might be a good way to play this, but they're not for everyone. What about the smaller miners? Are they a better bet than the large caps? Lucas: Smaller miners can offer more upside if they have good projects, but they also carry more operational and balance sheet risk. In a stagflation environment, they might struggle with rising costs and financing constraints. The larger miners are generally safer bets, but they might not have as much upside. Luna: So it's a trade-off between risk and reward, just like everything else in this market. But I'm curious, what do you think the key signal to watch is for the miners going forward? Lucas: I'd watch the real yield on the ten-year Treasury. That's the biggest driver for gold. If real yields start to climb, gold will struggle. And I'd also watch the inflation data, especially the monthly CPI prints. If we see a string of downside surprises, the gold trade could unwind quickly. Luna: And what about the dollar? The Canadian dollar is sliding on trade war concerns, but a stronger dollar is usually bad for gold. Lucas: That's true. The dollar has been relatively stable, but if it strengthens further, that's a headwind. The trade war with Canada is a wildcard. It could push the dollar up, which would be negative for gold, or it could create more uncertainty, which could be positive. It's a complex picture. Luna: It seems like there are so many moving parts. But I guess that's what makes it a conversation worth having. Lucas: Absolutely. And speaking of conversations, I want to take a quick moment to mention something that's been on my mind. We make these episodes every day, and it's a lot of work, but it's also really rewarding. And the reason we can keep doing it, ad-free and independent, is because of a small group of listeners who chip in a few dollars a month through buy me a coffee dot com slash fexingo. That's what covers the editing, the hosting, the research — all of it. Luna: Yeah, it's genuinely a community-funded show. And we don't have ads, which means we can be straight with you. If you've gotten value out of these episodes, even a small monthly contribution makes a huge difference. Lucas: So if you're in a position to help, that would be amazing. And if not, no worries — we're just glad you're listening. Anyway, back to the miners. Luna: Right. So Lucas, you mentioned the 1970s. Let's dig into that a little more. If we're truly echoing that period, what does that mean for the miners over the next few years? Lucas: Well, in the 1970s, gold didn't really take off until the latter half of the decade, when inflation became entrenched and the Fed's credibility was in question. Once gold started moving, it went from around a hundred dollars an ounce to over eight hundred by 1980. Miners that had low costs and good management did exceptionally well during that period, but they also crashed hard when the tide turned. Luna: So the key is to be nimble. Know when to get out, not just when to get in. Lucas: Exactly. And that's why I keep coming back to capital discipline. The miners that survive and thrive are the ones that don't overextend. They use the high gold prices to pay down debt, return cash to shareholders, and maybe do some strategic acquisitions, but they don't go on a spending spree. Luna: That's a smart strategy. So, if you had to sum up the takeaway from this conversation, what would it be? Lucas: I'd say this: gold miners are a powerful but volatile way to play the stagflation trade. They offer leveraged upside if gold continues to rally, but they come with significant risk. If you're considering an investment, focus on miners with low costs, strong balance sheets, and disciplined management. And keep a close eye on real yields and inflation data. That's the key to knowing whether to hold on or run for the hills. Luna: I think that's a great note to end on. Thanks for breaking it down, Lucas. Lucas: Anytime, Luna. And thanks to all of you for listening. We'll be back tomorrow with another episode of Stagflation Conversations.