Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your Gold ETF Returns
Transcript
- Lucas: Gold is having a moment. Spot gold hit just over four thousand one hundred thirty-two dollars an ounce as of this morning — up three percent in just the last five days. And the big gold ETF, GLD, is up nearly four percent over the same stretch. But here's what I keep coming back to: if you own gold through an ETF, you're probably leaving some of that return on the table. Luna: Because of the expense ratio, right? GLD charges 0.40 percent annually. Lucas: Exactly. And that forty basis points is the obvious number. But what's less obvious is tracking error. GLD doesn't hold physical gold in a perfectly static way — they have to buy and sell bars, manage storage costs, and deal with creation-redemption mechanics. Over a full year, the gap between GLD's return and spot gold can be wider than the expense ratio suggests. Luna: So the 'set it and forget it' part of gold investing gets a little tricky. Lucas: Exactly. And on top of that, there's the capital gains distribution issue. ETFs can — and sometimes do — distribute capital gains to shareholders when the fund rebalances or when investors redeem shares in large blocks. That's a taxable event, even if you didn't sell anything. If you hold GLD in a taxable account, the IRS wants a piece. Luna: Which is one reason some people prefer physical bullion or a gold IRA, right? You defer taxes until you sell. Lucas: Right. But physical gold has its own costs — storage fees, insurance, the bid-ask spread when you buy and sell. And a gold IRA comes with custody fees. So there's really no free lunch. The question is which cost structure fits your timeline and account type. Luna: Let's tie this to today's numbers. The ten-year breakeven inflation rate ticked up to 2.28 percent yesterday. That's the market's expectation for average annual inflation over the next decade. It was 2.26 the day before. So inflation expectations are creeping up again. Lucas: And that's exactly the environment where gold tends to shine — or at least get a lot of attention. The Fed funds rate is sitting at 3.63 percent, meaning real short-term rates are still positive but not dramatically so. If inflation expectations keep rising, the case for gold strengthens because the opportunity cost of holding a non-yielding asset shrinks. Luna: But the real return on gold depends on what you pay to own it. If you're paying 0.40 percent a year in an ETF, plus trading costs, plus potential capital gains taxes — that eats into your purchasing power protection. Lucas: Exactly. And this is the quiet erosion we talk about on the show. Inflation is eating your cash, your fixed annuity income — and yes, it can eat your gold returns if you're not careful about the vehicle you choose. Luna: Speaking of which — if you're listening and these kinds of insights help you think about your portfolio differently, that's exactly the kind of value we try to deliver every day. We keep this show ad-free and independent, and listener support is what makes that possible. Lucas: Yeah, it's a small thing but it adds up. If today's episode was worth a coffee to you, the link is buy me a coffee dot com slash fexingo. That's all lowercase, no spaces. And we mean it — the smallest gesture keeps the lights on. Luna: Honestly, it's the reason we can focus on the numbers that matter without chasing sponsors. So thank you. Lucas: Alright, back to gold. One thing I want to flag: gold mining stocks, as measured by GDX, are up more than seven percent in the last five days. That's a much bigger move than spot gold. Luna: Mining stocks have operating leverage. When gold prices rise, their profits can increase faster because their costs don't move in lockstep. Lucas: Right. But they also come with company-specific risks — management decisions, geopolitical exposure, cost overruns. So even though GDX has outperformed GLD recently, it's a different risk profile. You're not just buying gold; you're buying a basket of businesses. Luna: And that means tracking error can go both ways. In a gold bull market, miners can shoot higher. But if gold pulls back, they can drop faster. Lucas: Exactly. So if you're using gold as a portfolio hedge, you probably want the purest exposure you can get — physical bullion, or an ETF that does a tight job tracking spot. If you're more aggressive, miners might make sense, but only if you understand the extra volatility. Luna: Let's talk about the tax angle for a second. If you hold GLD in a retirement account — a traditional IRA or a 401k — the capital gains distributions aren't a problem because everything is tax-deferred. But in a taxable account, you want to be aware. Lucas: Right. And if you're really concerned about tracking error and distributions, some investors prefer a physically-backed gold ETF that's structured as a grantor trust, like the one that holds allocated bars. But even those have storage fees baked in. Luna: So the bottom line is: gold is up, but the real return you take home depends on how you buy it. Lucas: And with the breakeven inflation rate ticking higher and the Fed holding rates steady, that's a conversation worth revisiting. Next time, we'll look at how inflation is quietly eating your bond ladder returns — because even a ten-year Treasury yielding around four percent might not keep up if inflation stays above two percent. Luna: Looking forward to that one. Lucas: Same. For now, check those expense ratios, know your account type, and ask yourself: is my gold hedge actually hedging, or just adding cost?