Gold’s $4,000 Correction Signals Strength, Not Surrender, in an Ongoing Bull Market

• Gold has corrected from $4,300 to $4,000, while leading gold equities have declined 15-20% from recent highs, representing normal volatility within a bull market rather than a trend reversal.
• The upcoming Q3 reporting season is expected to show record results due to the highest quarterly gold prices in history, potentially triggering renewed momentum and reactivation of buyback programs after reporting blackout periods end.
• Derek & Sam view the current pullback as a buying opportunity, transitioning from net sellers in August-September to net buyers in October, with plans to increase deployment through November-December ahead of strong Q1 seasonality.
• Major producers have achieved healthy balance sheets with comfortable debt levels, positioning them to return capital through dividends and aggressive buyback programs similar to S&P 500 behavior, which should support equity valuations going forward.
• The fundamental monetary debasement trade remains unchanged despite volatility, with government spending continuing regardless of shutdowns and debt growing faster than economic output, supporting long-term commodity bullishness.

Derek Mcpherson (Executive Chair) and Sam Pelaez (President, CEO, and CIO) of Olive Resource Capital addressed recent market volatility that has seen gold pull back from recent highs and equity markets experience consecutive Friday selloffs. They provided perspective on what they characterise as normal seasonal volatility within an ongoing bull market, while outlining their strategy for capitalising on pullbacks in select gold and copper names. The conversation is particularly relevant for investors seeking to understand whether recent weakness represents a buying opportunity or a more fundamental shift in market dynamics.

Market Pullback in Context

The duo noted that gold has declined from a recent high of $4,300 per ounce to approximately $4,000, representing a 10% correction from the overall move that began at $2,000 in October 2023. Silver has similarly pulled back from $54.50 to around $47-48. While these moves have been accompanied by more significant declines in equity markets with some leading names like K92 Mining falling from $21 to below $17, and AngloGold retreating from $79 to $68, Sam emphasised that such pullbacks are characteristic of bull markets in the commodity sector.

Sam also noted that gold reached 92 on the weekly Relative Strength Index (RSI), the highest level ever recorded for the metal. For context, RSI measures momentum on a scale of 0 to 100, with readings above 70 considered extremely overbought. The extreme reading suggested the rally had extended beyond sustainable levels and required consolidation.

The team highlighted that historical analysis of mining equities during bull market periods reveals multiple episodes where stocks have corrected between 33% and 66% within the context of rising trends. Against this backdrop, current pullbacks of 10-20% appear modest and within normal parameters.

Seasonal Factors and Volatility

October's weakness was characterised as unsurprising given well-established seasonal patterns. Sam noted that October is historically the most volatile month in capital markets, and commodities typically face headwinds during the fall season, with pullbacks occurring eight out of ten times during this period. They had been anticipating this seasonal weakness since issuing guidance in their July and August monthly press releases.

The consecutive Friday selloffs were attributed to investors reducing risk exposure ahead of weekends when significant news events might occur while futures markets are closed. However, Sam noted that despite expectations of major geopolitical or economic news, the actual catalyst for the selloff has remained somewhat unclear. This lack of a definitive trigger, combined with insufficient "flushing out" of positions, suggests that additional downside volatility may occur before the correction completes.

Q3 Earnings as the Next Catalyst

The upcoming Q3 reporting season was identified as a critical catalyst that could shift momentum back in favour of gold equities. The third quarter featured the highest gold prices on record, which should translate into exceptional financial results for producers. The duo expect to see increasing cash flow, free cash flow, and earnings on a per-share basis across the sector.

Beyond the strong absolute numbers, the team highlighted an important structural factor: buyback programs are typically suspended during blackout periods before earnings releases, similar to restrictions on insider trading. With most large-cap and mid-cap producers scheduled to report around November 15, the reactivation of buyback programs could provide significant technical support for equity prices.

Derek and Sam drew parallels to the S&P 500, suggesting that gold producers have "graduated" to resemble large-cap equities in terms of their behavior. Just as the broader market has been characterised by aggressive buying of pullbacks and sustained buyback programs from issuers, gold producers are positioned to adopt similar patterns. With many companies now carrying healthy balance sheets and debt levels below historical norms, excess cash flow is increasingly directed toward share repurchases rather than debt reduction.

The CEO of AngloGold Ashanti was cited as having remarked that "we have a strong balance sheet, so does everybody else here," underscoring the sector-wide financial health. Several companies, including Kinross Gold, have already indicated intentions to return capital through buybacks once debt reaches comfortable levels.

Capital Deployment Strategy

Derek & Sam disclosed their positioning and tactical approach to the current market environment. They entered September with approximately 10% cash after trimming positions in strong-performing names during August and September. This positioning reflected preparation for anticipated seasonal weakness and provided dry powder for redeployment.

During October, they transitioned to being net buyers, though not in an aggressive manner. The strategy involves selectively adding to high-conviction names that have pulled back significantly but where the long-term investment thesis remains intact. One specific example mentioned was Bellevue Gold, where the team has continued accumulating shares despite mediocre Q3 results, viewing near-term volatility as an opportunity to build positions at attractive valuations.

The duo indicated they expect to ramp up investment activity in late November rather than deploying all available capital immediately. This phased approach reflects uncertainty about whether the correction has fully run its course. They suggested that a break below the psychological $4,000 level in gold could trigger additional forced liquidations, creating a final "flush" that would allow the market to reset and begin moving higher again.

Looking ahead, both men expressed confidence about deployment timing relative to seasonal patterns. Sam noted that the traditional year-end rally does not begin on December 23rd but typically starts in the second half of November, running through the year-end. This seasonal strength coincides with what is historically the strongest period for commodities in Q1, making late-year positioning particularly attractive.

Absence of Tax-Loss Selling

An important observation for investors concerns the likely absence of significant tax-loss selling pressure this year. With most gold and commodity equities trading within 10% of their 52-week highs, the vast majority of investors are sitting on gains rather than losses. This contrasts sharply with typical year-end dynamics in small-cap markets, where tax-loss selling often creates additional downward pressure in November and December.

The absence of this technical headwind means that if momentum builds coming out of Q3 reporting season, there are fewer structural impediments to sustained gains through year-end. This factor reinforces the duos' baseline expectation for a positive trajectory in the final two months of 2025.

Fundamental Investment Thesis Remains Intact

Throughout the discussion, Derek & Sam repeatedly emphasised that the core investment case for gold and commodities has not changed. The "monetary debasement trade" continues unabated, with government spending persisting regardless of political theater around shutdowns or fiscal discipline. Sam cited a news item where the Department of Homeland Security spent $181 million on two private jets while the government was officially closed and employees were not receiving paychecks.

This anecdote illustrated the broader point that government expenditures continue growing faster than the underlying economy, creating a vicious cycle of expanding debt that supports long-term gold demand. The fundamental drivers of currency debasement, unlimited government spending, and growing debt-to-GDP ratios remain firmly in place across developed economies.

Copper and Industrial Commodities

While gold dominated the discussion, the duo also addressed copper markets, where the commodity itself has held relatively firm around $5.00 per pound, but equities have declined in sympathy with broader market weakness. This dislocation was viewed as creating opportunities in select copper names, though the team has been "picking away" in a limited manner rather than building large positions.

The copper thesis centers on extremely tight supply conditions that have persisted despite various demand concerns. The fact that copper prices have remained elevated while equities have weakened represents a disconnect that could correct quickly if market sentiment improves.

Beyond copper, Derek & Sam are also monitoring opportunities to expand exposure to more industrial commodities, potentially extending into oil and gas and downstream chemical sectors. However, recent announcements regarding secondary sanctions on countries purchasing Russian crude, primarily China and India have created uncertainty about how those markets will evolve. Sam acknowledged that while this could provide a catalyst for oil and gas markets, political realities limit enthusiasm for significantly higher oil prices, as politicians generally prefer lower energy costs.

Technical Considerations to avoid Risks

From a technical perspective, Derek acknowledged that a break below $4,000 in gold could trigger cascading liquidations. Modern market structure includes participants who deliberately force breaks of psychological levels to trigger stop-losses and automated selling, then immediately reverse positions to buy the liquidation. While this creates volatility, it can also provide the "flush" that clears out weak hands and establishes a foundation for the next leg higher.

The duo’s approach to risk management involves focusing capital deployment on high-conviction names rather than spreading investments broadly across the sector. This concentrated approach reflects their view that not all commodity equities are created equal, and that significant value gaps exist even after the sector's strong performance.

Geopolitical and News Flow Considerations

The discussion acknowledged the rapid pace of news flow, including recent tensions between the Trump administration and Canadian leadership, as well as the cancellation or delay of a proposed meeting between Trump and Putin in Budapest. While these developments contribute to the volatility that drives investors to reduce exposure ahead of weekends, the market has been searching for a clear catalyst to explain the recent selloff without finding one.

Notably, progress toward peace in the Middle East described somewhat hyperbolically as closer than at any point in recent history has not materially impacted gold prices, suggesting that geopolitical risk premium is not the primary driver of the metal's strength. This observation reinforces the view that monetary and fiscal dynamics, rather than geopolitical uncertainty, constitute the dominant narrative supporting commodity prices.

Key Takeaways

Derek & Sam's analysis presents recent market volatility as a normal correction within an ongoing bull market rather than a fundamental shift in trend. Their transition from net sellers in late summer to net buyers in October, with plans to increase deployment through year-end, signals confidence that the current pullback represents opportunity rather than risk. The imminent Q3 earnings season, featuring record gold prices and likely reactivation of buyback programs, provides a near-term catalyst for renewed momentum. Critically, the fundamental monetary debasement thesis remains entirely intact, with government spending and debt dynamics continuing to support long-term commodity demand. For investors, the message is clear: short-term volatility should be viewed as an opportunity to accumulate positions in high-quality names ahead of what could be a strong finish to 2025 and an even stronger start to 2026, given favorable seasonal patterns in Q1.

TL;DR

Gold's correction from $4,300 to $4,000 represents normal bull market volatility rather than trend reversal, with upcoming Q3 earnings expected to show record results and trigger buyback program reactivations. Derek & Sam have transitioned from net sellers in August-September to net buyers in October, viewing current weakness as an opportunity ahead of strong Q1 seasonality. The core monetary debasement thesis remains intact with government spending continuing unabated, supporting long-term commodity valuations despite near-term volatility.

FAQ's (AI Generated)