Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Eating Your Gold Investment Gains
Transcript
- Lucas: Gold is at four thousand one hundred fifty-nine dollars an ounce, up more than three percent in the last five days. The GLD ETF is at three hundred eighty point seven, the miners are also ripping. And if you bought gold a year ago as an inflation hedge, you are probably feeling pretty good right now. Luna: Feeling good, yeah. But also maybe wondering why your purchasing power hasn't kept pace with the headline number? Lucas: Exactly. Because gold has a hidden cost structure that nobody talks about when they're pitching it as the ultimate inflation hedge. Storage fees, insurance, the bid-ask spread when you actually sell. And then the big one — the opportunity cost of holding something that doesn't yield a dime. Luna: Right. Gold just sits there. No dividend, no coupon. You're relying entirely on price appreciation. Lucas: And with the ten-year breakeven inflation rate at two point two three percent, the market is basically saying inflation expectations are fairly well anchored. So if you bought gold in 2024 at around two thousand, you've had a great run. But the question is whether the next leg is as profitable net of those costs. Luna: So let's put some numbers on it. What are we actually paying to hold gold? Lucas: Let's start with the GLD ETF. The expense ratio is forty basis points — so forty dollars per year on a ten thousand dollar position. That's not nothing. But if you hold physical gold through a dealer, you might pay storage fees of fifty to a hundred basis points annually. Plus insurance. Plus the spread between bid and ask when you buy and sell, which can be one to three percent each way. Luna: That spread really adds up. If you're in and out, you're losing two to six percent just on the transaction. Lucas: Right. And then there's the opportunity cost. The ten-year Treasury yields about four point two five percent right now. So if you had put ten thousand dollars into Treasuries instead of gold, you'd have collected about four hundred and twenty five dollars in interest over the last year. Gold went up way more than that, so you still came out ahead. But if gold goes sideways for a year, you're losing relative to bonds. Luna: And that's exactly the scenario some analysts are worried about. Gold has had a massive run, and if inflation continues to moderate, the hedge demand might fade. Lucas: Yeah. The core PCE price index is at one hundred thirty point one, up from one hundred twenty nine point six seven a month ago. Inflation is still there, but it's not accelerating. The Fed funds rate is at three point six three percent and has been flat. So the macro backdrop for gold is still supportive, but not as urgently as it was in 2022. Luna: I want to talk about the miners for a second. The GDX is up three and a half percent in five days. Do those stocks suffer from the same hidden costs? Lucas: They do and they don't. Mining stocks are equities, so they can pay dividends and they have operational leverage to the gold price. But they also have their own cost structure — rising labor costs, energy costs, equipment. And those costs are also being eaten by inflation. So the miners are a leveraged play on gold, but they're not a pure inflation hedge. Luna: So what's the takeaway for someone who wants to use gold to protect purchasing power? Are they better off with the ETF, physical, or miners? Lucas: I think the key is to be aware of the frictions. If you're buying physical, you need to plan for long holding periods to amortize those transaction costs. If you're buying the ETF, you're paying that forty basis points annually, but you get liquidity and no storage hassle. If you're buying miners, you're taking on equity risk and company-specific risk. The worst thing you can do is buy gold, forget about the costs, and then wonder why your real return is lower than the spot price move. Luna: And speak of being aware of hidden costs and real returns — we should be transparent about something ourselves. Lucas: Yeah. We keep this show ad-free, and a small group of listeners chips in monthly to make that possible. If you find these conversations helpful, you can support the show at buy me a coffee dot com slash fexingo. No pressure ever, but it's what keeps us independent. Luna: And we really mean that. It's a small gesture that goes a long way in covering production costs. So thank you if you already do. Lucas: Alright, back to gold. One more thing I want to flag — the silver price is at sixty two dollars an ounce, up four point three percent in five days. Silver has even higher storage costs relative to its value because it's bulkier. And the bid-ask spreads on silver coins can be brutal. Luna: Right. So if you're thinking of diversifying into precious metals, you really need to factor in the total cost of ownership, not just the spot price appreciation. Lucas: Exactly. And that's the thing about inflation hedging — there's no free lunch. Every asset class has its own friction. For gold, the friction is storage, spreads, and zero yield. For TIPS, it's the tax treatment and the fact that the principal adjustment is taxed as income. For real estate, it's illiquidity and maintenance costs. The best hedge is probably a diversified mix, but you have to know what you're paying. Luna: And the market's telling us that inflation expectations are around two point two three percent. So if you're paying one percent in costs to hold gold, you're eating almost half of the expected inflation benefit. Lucas: That's a great way to frame it. If the breakeven is two point two three, and your all-in cost to hold gold is one point five percent, you're only getting seventy three basis points of net inflation protection. That puts the whole hedge in perspective. Luna: So for the listener who owns gold, what's the one thing they should check today? Lucas: Check your all-in holding cost. If you're in the GLD, look at the expense ratio plus any trading commissions. If you're physical, ask your dealer what the buy-sell spread is right now. If it's more than two percent, you might want to consider switching to a lower-cost vehicle. And if you're holding gold as a long-term insurance policy, that's fine — just be aware of the drag. Luna: And don't forget to rebalance. If gold has become a bigger part of your portfolio than you intended, you might be taking on more risk than you think. Lucas: Good point. With the S&P at seven thousand five hundred thirty five, up one point three percent in five days, equities are also doing well. The opportunity cost of holding a big gold position right now is real. But that's a topic for another episode. Luna: Fair enough. I think we've given people plenty to think about. Thanks for listening. Lucas: Until next time.