Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / How Stagflation Is Reshaping the Gold Mining Industry
Transcript
- Lucas: Gold just crossed $4,094 an ounce as of this morning. That's a two percent gain in the last five days alone, and the miners are up even more — the GDX, the gold miner ETF, is up seven and a half percent over that same stretch. Luna: Which is interesting because mining stocks have often lagged the metal in past run-ups. Are we seeing that change? Lucas: We are. And I think it's because the market is finally pricing in a durable shift in the cost structure of production. I want to focus today on one specific mine — Barrick Gold's Cortez mine in Nevada — because it's a perfect lens for understanding what stagflation actually does to a physical asset business. Luna: Cortez is one of those huge open-pit operations, right? Tier one asset. Lucas: Exactly. It's been producing for decades, but the grade has been declining — they're pulling ore that's maybe 1.5 grams per ton now, down from 3 or 4 grams in the early 2000s. That means more rock moved per ounce, more diesel, more explosives, more water treatment. And all of those input costs are rising with inflation. Lucas: But here's the thing: Barrick reported their all-in sustaining cost at Cortez last year at around $1,400 an ounce. With gold at $4,094, that's a margin of about $2,700 per ounce. Even if costs rise another 10 percent, the margin still grows in absolute terms. Luna: So high inflation actually widens their profit if they've locked in debt at fixed rates and the gold price keeps climbing. Lucas: Right. And that's the stagflation playbook for mining. You have fixed-cost debt from十年前 at 4 percent, now being repaid with inflated dollars and sold into a rising gold market. The operating leverage is enormous. Luna: It's almost like a natural hedge. If the economy slows and people are nervous, gold goes up. If inflation stays hot, gold goes up. And if both happen at once — you get this. Lucas: You know, it's conversations like this — where we dig into a single mine's economics — that I think our listeners really appreciate. And it's only possible because of the people who support the show. If walking through the economy with us has made something click, you can help keep this ad-free at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a simple way to say this kind of independent analysis matters. Now, back to the gold — Lucas, you mentioned the GDX chart has a golden cross forming? Lucas: It does. The 50-day moving average just crossed above the 200-day moving average for the first time since early 2024. That's a technical signal, but it has fundamental backing here. The GDX is up 22 percent year-to-date while the S&P 500 is basically flat. Luna: And you've got the broader macro support: real rates are still low even after the Fed's hikes, central banks are buying gold at record levels — the People's Bank of China added another 10 tons in June. Lucas: That's the other structural factor. Central bank demand has shifted from roughly 500 tons annually a decade ago to over 1,000 tons the last two years. They're diversifying away from dollar reserves. That's a persistent bid under the market that doesn't care about the business cycle. Luna: So for a retail investor, is it better to own the metal or the miner? Lucas: They're different risk profiles. Gold itself is a store of value with no counterparty risk. But miners offer operating leverage — if gold goes up another 10 percent, earnings at a company like Barrick could jump 20 or 30 percent because costs don't move in lockstep. The flip side is that miners have execution risk, cost overruns, regulatory hurdles. Luna: And that's where the specific mine matters. Cortez is a low-cost producer, but not every mine is. Some of the smaller juniors are operating at all-in costs above $2,000 an ounce. Lucas: Exactly. That's why we have to look at the cost curve. The industry average all-in sustaining cost is around $1,500 to $1,600 an ounce. But at the high end, you've got mines in jurisdictions like South Africa or Russia where costs are pushing $2,000. At current gold prices, they're still profitable, but with much thinner margins. Lucas: And here's where the inflation piece really bites: labor costs at mines are up 8 to 10 percent year-over-year. Steel for grinding mills is up. Even the cyanide used in extraction has gotten more expensive. So the lower-grade mines are getting squeezed from both sides. Luna: But Cortez keeps churning. Nevada is a good jurisdiction — stable, relatively low regulation compared to some developing countries. Barrick has been investing in automation there too, which helps control labor costs. Lucas: They've deployed autonomous haul trucks at Cortez and another Nevada mine. That's a capital-intensive fix, but it reduces the exposure to rising wages. In a stagflation environment, that kind of substitution — capital for labor — becomes a strategic advantage. Luna: So the takeaway might be that not all gold miners are created equal in this cycle. The ones with long-lived, low-cost assets in safe jurisdictions are the ones that can compound. Lucas: And they're also the ones that can sustain dividends. Barrick pays a variable dividend tied to gold price — at current levels, the yield is around 2.5 percent. That's not huge, but it's growing. Compare that to a bond yielding 4.5 percent with no inflation protection. Luna: Right. So there's a total return story too — price appreciation plus a rising dividend. That's what starts to attract institutional money. Lucas: I think that's the key shift we're seeing. Gold miners used to be seen as a speculative play — you bought them when you thought gold would spike. But with the cost structure now better understood and the macro backdrop so supportive, they're being re-rated as real assets with pricing power. Luna: And the data backs that up. The GDX's price to earnings ratio has expanded from about 12 times trailing earnings a year ago to 18 times now. That's multiple expansion, not just earnings growth. Lucas: That's a sign that the market is assigning a higher quality premium to these companies. They're no longer just call options on gold. They're seen as durable businesses in an inflationary world. Luna: It's also worth noting that gold mining stocks are still a relatively small part of most portfolios. The entire GDX market cap is about $50 billion. That's tiny compared to tech or healthcare. Lucas: Which means there's room for more capital to flow in. And if inflation stays sticky and growth remains slow, that flow could continue. The CPI data from June showed headline inflation easing to 332.6 from 333.98, but core PCE actually ticked up. The Fed isn't declaring victory yet. Luna: And the ten-year breakeven inflation rate is at 2.28 percent, up from 2.26. That suggests the bond market still expects above-target inflation for the next decade. Lucas: That's the perfect fuel for gold and gold miners. Real yields are negative when you adjust for that breakeven. And negative real yields are historically the strongest driver of gold prices. Luna: So what's the risk? If the Fed actually gets inflation back to 2 percent and growth picks up, gold could lose its luster. Lucas: That's the bull case against it. But look at the labor market — unemployment is at 4.2 percent, job openings are still over 7.5 million, but wage growth is only 3 percent annualized. That's not the kind of overheating that would force the Fed to hike aggressively. It's more of a steady-state stagflation. Lucas: And that steady state is actually quite favorable for miners. They have pricing power from gold, cost pass-through from inflation, and a buyer of last resort in central banks. Luna: It feels like the stars have aligned for this sector in a way they haven't since the late 1970s. Lucas: The late 1970s is the obvious parallel. Gold went from $35 an ounce in 1971 to $850 in 1980. The miners that survived that cycle — companies like Newmont and Barrick — became the industry leaders. We might be in the early innings of a similar move. Luna: But with a much more sophisticated investor base and better capital discipline. The miners aren't blowing cash on stupid acquisitions this time. Lucas: That's the crucial difference. In the 1980s, miners overpaid for marginal deposits and then got crushed when gold corrected. Today, Barrick and Newmont are focused on free cash flow, debt reduction, and shareholder returns. The balance sheets are much stronger. Luna: So if someone wants to look at this more closely, what's the one number they should track? Lucas: All-in sustaining cost per ounce relative to the gold price. That's the margin. If you see that margin expanding — which it is now — the stocks tend to follow. The other metric is reserve replacement. A miner that's replacing reserves at a cost below the gold price is building long-term value. Luna: And Cortez is doing that? Barrick replaced 120 percent of production last year across their portfolio. Lucas: They did. That's a sign of sustainability. Because a gold mine is a depleting asset. If you're not finding new ounces, you're shrinking. Luna: So the message is: in stagflation, look for businesses with pricing power, fixed-cost leverage, and the ability to replace what they consume. Gold miners like Barrick check all those boxes. Lucas: And that's the kind of concrete thinking we try to bring every episode. Next time, we'll look at another industry where the inflation math is shifting — the self-storage business, which has a very different cost structure. Luna: Looking forward to it. Until then.