Latest / Inflation Explained with Fexingo: CPI, Prices, and the Cost of Living for Everyday People / How Gold Miners Are Beating Inflation Twice
Transcript
- Lucas: Gold is at four thousand three hundred eighty-three dollars an ounce. That's up four percent in the last five days alone, which is impressive enough. But here's what caught my eye — gold mining stocks, tracked by the GDX ETF, are up fifteen point two percent over the same period. Luna: So the miners are outpacing the metal by a factor of nearly four to one. That's a big divergence. Lucas: Right. And it's happening at the same time that the ten-year breakeven inflation rate — that's the market's implied expectation for average inflation over the next decade — has actually ticked down to two point two nine percent. So we've got gold rallying while inflation expectations cool. That's unusual. Luna: If walking through the economy with us has made something click, the way these episodes stay ad-free is listener support. Lucas: Yeah, it's a buy me a coffee model — buy me a coffee dot com slash fexingo. It's what keeps this show independent, and if you've gotten value from it, that's the place. Luna: Exactly. So back to gold miners — why are they outperforming the metal so dramatically right now? Lucas: Let's start with the gold price itself. At four thousand three hundred eighty-three dollars, gold is near an all-time high. That's a direct revenue boost for miners — every ounce they pull out of the ground is worth more. But there's a second layer: their costs haven't risen at the same pace. Luna: Because inflation in energy and labor — their two biggest inputs — is cooling? Lucas: Exactly. Look at the wholesale price data we got on June eleventh — the Producer Price Index rose one point one percent in May, but that was driven by a surge in energy. But the trailing trend shows that diesel, natural gas, and electricity costs are actually flattening or declining year-over-year in many regions. Meanwhile, the CPI core reading for May was three hundred thirty-six point one — still elevated, but the month-over-month change has been moderating. Luna: So miners are seeing higher selling prices and lower input cost inflation. That's a margin expansion story. Lucas: Precisely. And the market is pricing that in. When you look at the GDX — up fifteen percent in a week — that's not just gold catching a bid. That's investors recalculating what these companies can earn if gold stays here or goes higher, while their cost structure becomes more manageable. Luna: What about the breakeven rate dropping to two point two nine? Normally, lower inflation expectations are bad for gold, because gold is seen as an inflation hedge. How do you square that? Lucas: That's the interesting tension. The breakeven rate reflects what bond markets expect for CPI over ten years. It's been drifting down since the hot CPI print in May — that four point two percent reading we talked about in episode forty-four — because the market is betting the Fed will keep rates restrictive enough to cool the economy. But gold isn't just an inflation hedge. It's also a real asset that benefits from falling real interest rates. Luna: Real rates being nominal rates minus expected inflation. So if the Fed holds the fed funds rate at three point six three percent — which is where it is now — and expected inflation drops, real rates go up. That's normally negative for gold. Lucas: Normally, yes. But we're in a weird spot. The breakeven is falling, but the nominal ten-year Treasury yield is also falling. So real rates haven't spiked. In fact, the ten-year breakeven at two point two nine percent is still above the Fed's two percent target. And gold has other drivers — central bank buying, geopolitical uncertainty, and the fact that the dollar index has been weakening. When the dollar falls, gold priced in dollars tends to rise. Luna: Plus the headlines this week — Iranian tankers exiting the U.S. blockade, UK inflation at two point eight percent, UK economy shrinking — there's plenty of uncertainty to keep safe-haven demand alive. Lucas: Exactly. So gold has multiple tailwinds. But what's really driving the miners is the operational leverage. When gold goes up ten percent, a miner's revenue goes up ten percent. But their fixed costs — mining equipment, overhead, permitting — they don't move much. So earnings per share can jump thirty, forty percent. That's the leverage the market is buying. Luna: And the GDX includes companies that are actually producing gold, not just explorers or developers. So it's more of a pure play on that leverage. Luna: But is this sustainable? If the Fed actually cuts rates later this year — and the market is pricing some probability of that — then real rates could fall, which would be even better for gold. But if inflation re-accelerates, the Fed might have to hike again, which would be a headwind. Lucas: That's the key question. The Fed funds rate is at three point six three percent right now, down from the peak, but the daily rate actually ticked up to three point six three on June fifteenth from three point six two. So the market is still debating the path. But for gold miners, the current environment — gold near all-time highs, input costs stabilizing — is a sweet spot. Even if gold stays flat, if their costs decline, margins expand. Luna: So the case for miners right now is a double benefit: higher revenue per ounce and lower cost per ounce. That's a powerful combination. Lucas: Exactly. And the market is recognizing that. The GDX has been lagging gold for much of the past year, but this week's fifteen percent surge suggests investors are finally leaning into the trade. It's a classic catch-up move. Luna: What about silver? You mentioned silver futures at seventy point seven seven, up four point three percent this week. Is that part of the same story? Lucas: Silver is a different beast. It has industrial demand — solar panels, electronics — so it's more tied to economic growth. But it also has monetary demand as a precious metal. The silver miners' ETF, SIL, hasn't moved as much as GDX. But silver at seventy dollars is high historically, and if gold keeps rallying, silver could catch up too. It's more volatile. Luna: For listeners who want to understand this without owning individual stocks, what's the simplest takeaway? Lucas: If you believe gold can hold these levels or go higher — and there are good reasons to think that, given central bank buying and geopolitical risks — then gold miners offer leveraged exposure. But it's not a one-way bet. If the economy surprises to the upside and the Fed has to tighten again, gold could sell off, and miners would get hit harder. Luna: So it's a conviction trade. You need a view on inflation, Fed policy, and the global backdrop. Lucas: Right. And that's what makes it interesting for our show. Inflation isn't just about CPI numbers. It's about how different assets react to the same data. Today, the data says core inflation is still sticky at three hundred thirty-six point one on the CPI, but the breakeven rate is falling. That contradiction is exactly why gold miners are rallying — because they benefit from high nominal prices but falling cost pressures. Luna: So the miners are essentially a bet that inflation in the real economy is cooling, but that gold's other drivers — dollar weakness, central bank buying, uncertainty — keep the metal elevated. Lucas: That's a good way to put it. And we'll see over the next few months whether that thesis holds. But for now, the market is voting with its dollars — fifteen percent in a week is a strong signal. Luna: And a reminder that in economics, the story is never just one number. You have to look at the interactions. Lucas: Exactly. Thanks for joining us on this deep dive. We'll keep tracking these moves.