Gold Plunges Below $4,000: Collapse Or Rebound Next? | Derek Macpherson

Derek Macpherson · West Point Gold Corp.

Wars give gold only a brief share-price blip; they rarely have a lasting effect on the gold price.

Historically, war or geopolitical unrest can cause a short-lived move in gold or gold-share prices, but it generally does not have a long-term impact. He says he has not seen a lasting impact on the gold price from the current conflicts, even alongside inflation running above target and dollar uncertainty.

“what we've seen historically, while war is often a... can give the gold share price a blip or geopolitical unrest, it generally isn't a long term... Generally doesn't have a long term impact.”at 3:01

Derek Macpherson · West Point Gold Corp.

Central bank buying is underpinning gold, which is holding up despite high rates and a firm dollar.

Gold is holding up better than expected despite high rates, a Fed hike and a relatively strong dollar, which would historically pressure it. The underlying support is central bank buying, driven by the slow erosion of the US dollar's reserve-currency role. Central banks need to move very large volumes, so they buy steadily and slowly. This buying started the bull market about two and a half years ago, before Western investors arrived; the run to $5,000 came when they did, and central bank buying is now holding the price up through the pullback. Central banks can hold the gold price in if they choose.

“The underlying piece... the strength of the US dollar as the reserve currency of the world is slowly declining... And that slow decline has central bank buying, and you can't... You're not gonna beat central banks on the buy side. If they wanna hold the gold price in, they can.”at 4:15

Derek Macpherson · West Point Gold Corp.

Rising rates and an Iran resolution that cuts inflation are the main downside risks for gold.

Continued rate increases are a headwind for gold because high real rates and a strong dollar historically weigh on it. He also sees a resolution in Iran as a possible negative, not because of lower geopolitical risk but because it would drag on inflation. Lower inflation would reduce gold's appeal as an inflation hedge. He hedges this as a pair of key factors rather than a firm forecast, and he expects central bank buying to limit the damage.

“probably a resolution in Iran... because of the fact that you're gonna have an... A negative drag on inflation. And so I think those two things are... your key factors that could be... negative for gold.”at 6:09

Derek Macpherson · West Point Gold Corp.

Overbought gold markets show up as rapid financing growth, strong subscription and sharply falling cost of capital.

He says the clearest tell that a commodity market, including equities, has become overbought is the pace at which financings rise, how well they are subscribed, and how quickly the cost of capital falls. He saw this in silver as well as gold around the January peak. Financings were abundant, momentum was strong, and money was being thrown at the sector. This does not mean the market is at the exact top, but it is much closer to the top than the bottom.

“You can tell the market gets overbought because you... The pace at which you see financings go up, and then... And how well they're subscribed, and the cost of capital at those times. You see it decline very, very quickly.”at 8:46

Derek Macpherson · West Point Gold Corp.

Senior and mid-tier gold producers are printing cash and prioritizing growth; juniors should be more conservative.

At around $4,000 gold, senior and mid-tier producers are generating large amounts of cash and are prioritizing growth, with more Q3 results coming. Investor interest in earlier-stage companies is also strong, and smaller equities are pulling back, which may let aggressive players buy cheaply. For a pre-revenue explorer like West Point, the picture is different: spending must be more conservative because it is important to know where the next dollars will come from if the downturn lasts beyond Q4.

“They're printing cash there significantly... I think they're prioritizing growth. There's a lot of... interest out there in earlier stage companies... You're gonna be a little more conservative with how you spend money, a little less aggressive.”at 11:01

Derek Macpherson · West Point Gold Corp.

Broader US markets are choppy with thin breadth; only the tech trade is working.

He describes a risk-off environment in which broader markets are choppy. Only the tech trade is working, while the breadth of the market is thin. Rising interest rates and the Fed's latest hike add to the pressure on the broader market and on gold.

“Really, only the tech trade is working right now. Everything else, if you look at the broader markets or the breadth of the market, it's kind of thin.”at 1:31

Derek Macpherson · West Point Gold Corp.

The US dollar's reserve-currency status is slowly declining, a long-term backdrop supporting gold.

The dollar is strong relative to peers for now, a 'best shanty in a bad neighborhood' situation. Underneath, its role as the world's reserve currency is slowly declining. That gradual erosion is what drives central banks to diversify into gold, which is the structural support for the gold price.

“The underlying piece... the strength of the US dollar as the reserve currency of the world is slowly declining... And that slow decline has central bank buying.”at 4:15