In February, I wrote an article here titled "Heeding Martin Armstrong's Gold Warning." Armstrong had warned at the end of 2012 that since gold has risen 13 years in a row, it was not a charm and it would be vulnerable to a collapse in price. I noted that I heeded his advise and sold my Central Fund of Canada (CEF), which holds gold and silver bullion in early January.
Here is his latest warning he issued in an April 19th blog post: (emphasis mine)
"We elected Weekly Bearish Reversals in both metals with gold closing at 1397.2 and 2304.1. Gold closed also just below the Weekly Break line 1398.6. This is warning that the FAILURE to exceed Friday's 4/19 high intraday, and a penetration of 1310, we are looking at a drop to 1158. Breach that, and we very well may see 907 in 2 weeks."
Gold is now trading at $1421 as I write. A potential collapse to $907 in just two weeks? Let me take you through what Armstrong's been thinking as to why he would make such a prediction, but more so, why he's been right so far.
Beginning with a blog post this past January 3rd, he wrote a piece titled "Fed Concerns Bearish For Gold" where he noted that he believed the Fed would turn its attention to the bond market and making sure that interest rates would not rise. He wrote in that post:
"The Fed is concerned that if interest rates rise because of inflation, the balance sheet will tank. The Fed will shift now to be more concerned about the bond market. The crisis they face is rates are so low, even a quarter point up tick will be devastating for the bond market."
With that in mind, the money printing would likely be seen with a more hawkish position from the Fed. It can be argued that it has been the money printing or QE that has been a driving force behind gold bulls expecting higher prices.
On April 10th, we got the FOMC minutes from their March 19th and 20th meetings, and it was noted that Committee members "thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end."
Clearly now, the Fed is getting more cautious about their QE programs and perhaps markets are beginning to price in the end of QE.
As Armstrong noted, the Fed's Balance Sheet, which securities owned outright is now over $3 trillion, of which $1.819 trillion is in Treasury securities and $1.12 trillion is held in mortgage backed securities, is vulnerable to interest rate risk. If interest rates rise, it could impact the value of long dated bonds to the downside. Hence why the Fed should be concerned about interest rates rising.
The 10 year treasury yielded 1.84% in the beginning of the year and is now yielding 1.68%. If making sure interest rates didn't rise this year was the Fed's concern, they have thus far succeeded.
Another reason why Armstrong has been calling for a potential collapse in the gold price was because it has gotten overbought and over hyped. He noted on January 26th in his blog:
"The Goldbugs have sold gold to just about everyone who would listen. Instead of helping people survive, it is all about desperately trying to keep the balloon inflated and sell even more to the same people."
In the same post, he noted:
"While gold is tired after rallying 13 years, it does not appear to be a bubble. Instead, it will work its way to support. However, the market will have to shake the tree and force a number of people to liquidate before a rally emerges in 2015 into 2021-2022.."
A good call back in January, as the tree is certainly being shaken now.
Armstrong comes to us with a trader's mindset and understands that in markets, there is a time to buy and a time to sell. With that said, he's been suggesting that both gold (GLD) and silver (SLV) would be prone to pullbacks for now.
Ultimately, Armstrong is bullish on gold as he finds it will prove to be a hedge against a collapse in confidence in government when his economic confidence model turns down beginning October of 2015.
I remain on the sidelines for both paper gold and silver, but will likely be a buyer again if the markets find themselves in a full-blown panic prior to late 2015.