Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Stagflation Is Driving a Boom in Gold Bug Investing
Transcript
- Lucas: So gold mining stocks just had their best week in months. The GDX ETF — that's the big gold miners fund — jumped more than 5 percent in five days. And gold itself? Sitting at roughly forty-five thirty-seven an ounce. Luna: Five percent in a week for miners is not nothing. Especially when the S&P 500 is basically flat over the same stretch. Lucas: Right, the broad market's drifting. S&P at seventy-five eighty, up maybe one and a half percent over five days. So gold miners are massively outperforming. And this is in a week where we got the April core PCE print — three point three percent annualized, right in line with expectations. Luna: That's still sticky. Three-point-three is not the two-point-something the Fed wants. And GDP growth is barely above one and a half percent annualized. That's the stagflation cocktail. Lucas: Exactly. You've got inflation running hot and growth running cold. And in that environment, the 1970s playbook says go buy gold. During the worst stagflation stretch from 1976 to 1980, gold returned over 400 percent. The S&P was basically flat in real terms. Luna: But is this purely an inflation trade? Or is there something else pushing gold miners specifically? Because gold itself was up only about 2 percent over those five days. GDX did more than double that. Lucas: I think it's two things. One, the operational leverage in mining stocks. When gold goes up, miners' profits go up faster because their costs are relatively fixed. But two — and this is the part I find more interesting — there's a geopolitical kicker here. Luna: The Iran conflict. Yeah, CNBC ran a headline saying the average U.S. household is paying an extra 450 dollars a year on gas and energy because of that war. Lucas: That's real. Energy inflation has been more persistent than the Fed expected — Chicago Fed's Goolsbee said exactly that this week. And when energy prices spike, it feeds through to mining costs. But it also feeds through to the broader inflation narrative. People start thinking: 'This isn't going away.' And gold is the classic hedge against that scenario. Luna: So the GDX move is a leveraged bet on the idea that inflation stays sticky and the geopolitical situation deteriorates further. Lucas: Right. And I want to be careful here. We deliberately don't run ads on these episodes. If walking through the economy with us has made something click, and you want to support that, the link is buy me a coffee dot com slash fexingo. No pressure, just a way to keep this ad-free. Luna: Yeah, it's a small thing that makes a big difference. Keeps us independent. Lucas: So back to the gold miners. One name in the GDX that's been moving is Newmont. But the broader trend is that the whole sector is pricing in a gold price that's higher than current spot. The market is saying: 'We think gold goes to 5,000 or higher.' Luna: Is that rational? Gold at forty-five thirty-seven is already near all-time highs. The previous peak was around twenty-seven hundred in 2024. So we're up huge. Lucas: It's rational if you believe the stagflation scenario persists. But here's the thing — the 1970s gold rally didn't happen in a straight line. Gold crashed 45 percent from 1975 to 1976 before it tripled. So there's real volatility. Luna: So buying GDX today means you're buying that volatility on steroids. Because miners add operational leverage on top of the commodity price. Lucas: Exactly. If gold drops 10 percent, GDX might drop 20. But if gold rallies another 10 percent from here, GDX could rally 25. You have to have the stomach for that. Luna: Who's buying this? Is it retail piling in because they see the headlines? Or institutions? Lucas: From the flows data I've seen, it's both. The GDX had net inflows of about 800 million dollars over the last month. That's significant for a sector ETF. And you see similar flows into gold bullion ETFs like GLD. So it's broad-based. Luna: But here's a question I keep coming back to: does holding gold miners actually hedge your portfolio? Or is it just a different kind of risk? Lucas: It's a different kind of risk. A pure gold hedge is bullion or an ETF like GLD. Miners add equity risk — management decisions, operational issues, geopolitical risk in the countries where they mine. In a stagflation scenario, gold bullion tends to hold up better because it's truly a store of value. Miners are more like a growth bet on the gold price. Luna: So if you're building a stagflation portfolio, you'd want physical gold or GLD as the core, and maybe GDX as a satellite. Lucas: That's how I'd think about it. And the data supports it. Over the last five years, GLD and GDX have a correlation of about 0.8. So they move together, but not perfectly. And GDX has higher volatility — its beta to the S&P is around 0.6, while GLD's is negative. So GDX still has some equity market risk. Luna: Interesting. So even in a stagflation trade, you can't fully escape equity risk. Lucas: You can't. And that's why I think the recent GDX surge is partly a 'catch-up' trade. Gold has been rallying for months, but miners were lagging. Now they're playing catch-up as investors rotate into the leveraged play. Luna: So what's the catalyst going forward? We have the Fed clearly prioritizing inflation over growth — Kashkari said this week the fight takes priority because the labor market is 'in decent shape.' So no rate cuts anytime soon. Lucas: Right. And that's actually supportive for gold in a weird way. If the Fed keeps rates high to fight inflation, but growth is slowing, you get tighter financial conditions. That's bad for most risk assets. But gold tends to benefit when real rates are falling or negative. And with inflation at 3.3 percent and the Fed funds rate at, say, 5 percent, real rates are about 1.7 percent — positive. So that's not the 1970s environment where real rates were deeply negative. Luna: So you're saying the macroeconomic setup isn't exactly the 1970s. Then why is gold at all-time highs? Lucas: Because there's also a geopolitical risk premium. The Iran conflict, the uncertainty around energy supplies, the broader deglobalization trend. Central banks are buying gold at record levels — they bought over a thousand tonnes last year. That's a structural bid. Luna: So it's not just stagflation. It's a multi-factor story. Lucas: Exactly. And that makes it harder to predict. If the Iran situation de-escalates, a big chunk of that premium could unwind quickly. But if it escalates, gold could go much higher. Luna: And where do miners fit in that scenario? If energy costs keep rising, their input costs go up too. So the leverage might not be as clean. Lucas: That's a great point. Mining is energy-intensive. Diesel, electricity — those are major costs. So if energy inflation stays persistent, margins get squeezed unless gold prices rise even faster. The GDX rally this week might be pricing in higher gold, but also maybe the market thinks energy costs have peaked. Luna: That's a bet I'm not sure I'd want to make. Energy inflation is still running hot. The April CPI showed energy up month over month. Lucas: Right. So you have to have conviction that gold will outrun energy costs. Historically, during the 1970s, it did. But that doesn't mean it will this time. Luna: So for our listeners who are thinking about adding a gold miners ETF to their portfolio, what's the one thing you'd say? Lucas: Size it appropriately. Don't make it more than 5 to 10 percent of your portfolio. And understand that you're making a leveraged bet on gold, with equity risk on top. If you want a pure hedge, use GLD or physical gold. If you want a higher-risk, higher-reward play, GDX can work, but only if you have the time horizon and stomach for 20 percent drawdowns. Luna: And watch the GDX to gold ratio. If it's near historical lows, it might be a good entry. If it's near highs, you're late. Lucas: Right now the ratio is about 0.02, which is around the middle of its historical range. So not extreme in either direction. But given the geopolitical uncertainty, I'd lean toward caution. The easy money in gold might have already been made. Luna: So the trade is getting crowded. That's always a risk. Lucas: It is. And when a trade gets crowded, the exits get small. So if you're going to play it, have a plan for when to take profits or cut losses. Luna: Alright. So to sum up: GDX surging on stagflation fears plus geopolitical risk, but it's not a simple trade. You need to understand the leverage and the crowding. Lucas: Exactly. And keep an eye on energy costs and Fed rhetoric. Those will be the key drivers in the coming weeks.