Latest / The Commodities Economy with Fexingo: Oil, Gold, Wheat, and Raw Material Markets / The Gold Crash Defying Inflation Logic
Transcript
- Lucas: Gold is supposed to be the ultimate inflation hedge. And right now, it is failing that test in spectacular fashion. Luna: You look at the headlines — CPI ticked up again in May, the ten-year breakeven is sitting near two-point-three-four percent — and gold is at a six-month low. That is not the relationship people expect. Lucas: Exactly. The spot price closed today at four-thousand-two-hundred-thirteen dollars an ounce, down nearly three percent over the last five days alone. Since the April high around forty-four hundred, we are looking at a drop of roughly four percent. Meanwhile, core CPI just printed at three-three-six-point-one, up from the prior month. So the old narrative — buy gold when inflation accelerates — is just not working. Luna: So what is breaking that link? If inflation is still sticky, what is pushing gold down? Lucas: I think the simplest answer is real yields. Nominal bond yields have been climbing faster than inflation expectations, so the real rate — what you actually earn after inflation — is moving higher. Gold competes with bonds that offer a positive real yield. When real yields go up, gold's opportunity cost goes up, and the metal becomes less attractive. Luna: And the dollar. The dollar index has been grinding higher too, right? That is usually a headwind for gold. Lucas: Big time. Dollar strength makes gold more expensive for overseas buyers, and we have seen that dynamic play out over the past month. But I think there is a third factor that does not get enough attention: the market is repricing the Fed's path. If the economy stays hot, the Fed may have to keep rates higher for longer, or even hike again. That expectation is showing up in the two-year yield, which is well above four percent again. Luna: So the inflation data that should be bullish for gold is actually bearish because it implies tighter monetary policy? Lucas: Exactly. The market is reading the CPI print not as an inflation signal, but as a 'the Fed will stay hawkish' signal. And gold hates that. It is almost a mirror image of the taper tantrum back in 2013, when gold crashed twenty-eight percent in a single year even though inflation was creeping up. The playbook is similar: real rates rise, dollar strengthens, and the speculative long gets crushed. Luna: Let's talk about that speculative positioning. Do you think there is still a lot of froth to unwind, or have the leveraged players already bailed? Lucas: The CFTC commitment of traders data from last week showed money managers cutting their net long position in gold futures by about fifteen percent. So there has been some liquidation, but open interest is still relatively high compared to the post-2020 average. I would not be surprised if we see another leg down if we get another strong jobs number or a hawkish dot plot at the next FOMC meeting. Luna: And what about the physical market? Are central banks still buying? Because that should provide a floor. Lucas: Central bank purchases have been a huge support for gold over the last three years, especially from China and emerging markets. But even that has tapered off. The latest IMF data shows net purchases slowed in April. And if the dollar stays strong, even central banks may step back. So the traditional supports are weakening. Luna: So if gold is broken as an inflation hedge, what is the alternative for investors who want to protect against rising prices? Lucas: Copper is interesting. It has actually been resilient, up about one percent over the past week, even though industrial metals broadly have been under pressure. Copper tends to respond to real economic demand and supply constraints, not just monetary expectations. And copper is a key input for electrification, so there is a secular demand story there. But it is also volatile. There is no perfect hedge. Luna: So gold is sending a signal that the market is more worried about tight money than about inflation itself. That is a pretty important macro signal. Lucas: I think that is exactly right. And if we see the breakeven start to fall — if inflation expectations actually roll over — then gold could find a bottom. But as long as real yields are rising and the dollar is bid, I would not jump in to catch this knife. Luna: Speaking of things that are useful — if today's episode helped you think about gold or inflation in a new way, these episodes stay ad-free because of listener support. You can find that at buy me a coffee dot com slash fexingo. Lucas: Yeah, completely. It is a small thing that makes a big difference for us. So if you found value in today's breakdown, that is the place. Lucas: Alright, so to bring it back to gold — let's talk about what might actually catalyze a reversal. What are you watching? Luna: I am watching the ten-year real yield. If it breaks above two percent, I think gold could test the four-thousand level. But if it rolls over, maybe gold stabilizes. Lucas: That is a good metric. I am also watching the geopolitical side. We had that headline today about Trump canceling strikes on Iran. If that situation escalates again, gold could get a safe-haven bid regardless of rates. But as of now, the market is shrugging off geopolitics in favor of macro. Luna: And the Fed. The next FOMC meeting is in July. If they signal any concern about slowing growth, that could cap rate expectations and help gold. Lucas: Exactly. It is a data-dependent game. Until the data shifts, the path of least resistance for gold is lower. But the setup is getting interesting for a potential mean reversion trade down the road. Luna: For now, the old inflation hedge is on the sidelines. Thanks for walking through it with us.