Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Gold Mining Industry
Transcript
- Lucas: Gold just hit another record high last week — futures touched $4,215 an ounce before settling. But if you look at the gold mining stocks, the picture is much messier. Luna: Yeah, I noticed that. The GDX, the gold miners ETF, was actually up less than two percent over the past five days, while gold itself dropped nearly three percent. That gap is strange. Lucas: Right. And over a longer horizon, it's even more pronounced. Gold is up something like 40 percent from two years ago, but the miners have barely budged. It's a classic stagflation paradox: the asset that's supposed to thrive in this environment isn't pulling its weight in the equities that produce it. Luna: If today's conversation made something click for you — maybe it's worth the price of a coffee. That link is buy me a coffee dot com slash fexingo. Just a small way to keep the show ad-free and independent. Lucas: Exactly. No pressure, but if it's useful, that's the place. So back to the miners — what's actually eating their margins? Lucas: Start with costs. The all-in sustaining cost for most major miners has jumped from around $1,200 an ounce in 2020 to well over $1,600 now. Diesel, explosives, steel grinding media — everything they use has gotten more expensive. Luna: And labor. Mining is a skilled trade, and with unemployment at 4.3 percent and job openings at 7.6 million, they're competing hard for welders, electricians, geologists. Lucas: Right. Newmont's last quarterly report showed their AISC hit $1,675 per ounce. That's up 12 percent year-over-year. Even with gold at $4,200, their margins are actually narrower than they were a year ago because costs rose faster. Luna: So the bullion rally is real, but it's being eaten by inflation on the input side. That's a very stagflation story. Lucas: It is. And there's another layer: supply chains. A lot of the big mines in Chile, Peru, South Africa rely on imported equipment and reagents. With shipping costs still elevated and port delays from geopolitical disruptions — the Iran situation is cascading through energy costs — it's taking longer to get critical parts. Luna: The ECB just hiked rates for the first time since 2023 because of energy costs from that conflict. That's a direct headwind for miners in Europe and Africa. Lucas: Yes. So you've got higher energy, higher freight, higher labor, and also higher borrowing costs. Miners are capital-intensive — they need to borrow for exploration and expansion. With interest rates where they are, the cost of capital has gone up. Luna: Which means even though gold is at an all-time high, the incentive to open new mines is actually lower than you'd expect. The hurdle rate for new projects has moved up. Lucas: Exactly. Barrick Gold's CEO was quoted recently saying they're being 'very disciplined' on capital allocation. That's code for 'we're not rushing to build new mines because the returns aren't there.' Luna: And the market is punishing them for it. The GDX is still trading at a price to earnings ratio that's below its five-year average, even with gold soaring. Lucas: Right. So the question for investors is: is this a structural disconnect that will eventually close, or are miners permanently impaired by cost inflation? Luna: I think there's a third possibility: that gold itself is in a bubble, and when it corrects, the miners will fall even harder. But let's look at the data. Gold prices are up partly on inflation expectations — the ten-year breakeven is at 2.31 percent, up from 2.29 last week. Lucas: And CPI came in at 4.2 percent annualized in May, the highest in three years. So the inflation narrative is firmly intact. But gold is also being driven by geopolitical fear — the Iran conflict, the UK economy shrinking, the Chinese tech funding cracks. That's a fragile support. Luna: Yeah, fear-driven rallies can reverse fast. If there's a ceasefire or a diplomatic breakthrough, gold could drop 10 percent in a week. And then miners, being leveraged, could drop 20. Lucas: So the cautious view is that miners are not a pure play on gold anymore. They're a play on cost management and operational efficiency. Companies that can hold AISC flat or down will outperform. Luna: Who's doing that well? I know Agnico Eagle has a pretty good track record on cost control. Lucas: They do. And also Kirkland Lake Gold, before the merger, was legendary. But right now, the whole sector is under pressure. You have to look at individual mine-by-mine costs, not just company averages. Luna: One more thing: the gold ETF, GLD, saw outflows last week — down 2.7 percent. That suggests retail investors are taking profits on bullion. But the miners ETF, GDX, was actually up. So professional money might be rotating into miners on the cheap. Lucas: That's a fascinating divergence. Retail selling gold, institutional buying miners. Could be a contrarian signal. But it's early days. Luna: So what's the takeaway for someone listening who's considering adding miners to their portfolio? Lucas: I'd say: look at the margin trend, not the gold price. If you believe inflation is persistent and costs will keep rising, miners could stay range-bound even if gold rallies. If you think energy costs will come down and supply chains normalize, then miners are deeply undervalued. Luna: And for the stagflation narrative, this is a perfect microcosm. High inflation in inputs, slow growth in output — the miners are living it. Lucas: Absolutely. And that's why we keep coming back to this show. Stagflation isn't just a macro concept — it shows up in the earnings reports of companies you've never thought about. Luna: Alright, next time we'll look at another industry getting squeezed. Thanks for listening.