Heeding Martin Armstrong's Gold Warning

Gold finished 2012 positive on a year over year basis for the 13th year in a row. Economist Martin Armstrong noted on December 31st, 2012:

"Gold closed higher than 2011 warning that 13 years up is not a charm."

Armstrong believes that gold is overbought and over hyped and that the gold bugs have sold gold to just about everyone that would listen. He noted on January 26th, 2012 in his blog:

"Gold remains vulnerable to a collapse although not instantly. A monthly closing beneath 1532 will signal that a drop to the mid-1100 zone is likely."

What prompted me to sell my Central Fund of Canada (CEF) in early January was the FMOC minutes from their December meeting. That there was concern about the benefits of continued QE not outweighing the risks of their bloated balance sheet.

Here are notes taken from Zerohedge blog on that report:

• *FED SAYS A FEW ON FOMC WANTED QE UNTIL ABOUT THE END OF 2013
• *FED: SEVERAL ON FOMC BACKED QE HALT OR CUT WELL BEFORE 2013 END
• *ALMOST ALL FOMC MEMBERS SAW POTENTIAL QE COSTS AS INCREASING

Armstrong wasn't so surprised about those comments. He wrote a post in his blog that same day titled: "Fed Concerns Bearish For Gold." He believes that the Fed is now mainly concerned about the bond market and keeping inflation down and interest rates low. This is especially true due to the fact that they have a balance sheet of $2.82 Trillion loaded with mortgage backed bonds and long term treasury bonds.

Here is a chart of the Monetary Base:

(Click to enlarge)

In Armstrong's own words he wrote on January 3rd:

"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."

The next day, I sold my shares of Central Fund of Canada , which holds 50% gold and 50% silver.

Here is a chart of SPDR Gold Trust Shares (GLD) to reflect the price of gold over the last 6 months:

(Click to enlarge)

Here is a chart of iShares Silver Trust (SLV) to reflect the price of silver over the last 6 months:

(Click to enlarge)

Armstrong's latest warning came today, where he noted:

"The key support on the weekly level in gold lies at 15795. A weekly closing below that will eventually be followed with a test of the 14100 to 14600 level. This is the bottom of the channel where gold should eventually test. The time for a rally in gold remains after 2015.75."

As of this writing, Gold stands at 1571.90, so we are below the 1579.50 close that is the support line on a weekly basis level.

Yesterday's FOMC's minutes were just as bearish for gold as the minutes that came out in January. Zerohedge blog again provided the bullets:

• SEVERAL FOMC PARTICIPANTS SAID EASING MAY PROMPT EXCESSIVE RISK
• MANY FOMC PARTICIPANTS VOICED CONCERN ABOUT RISKS OF MORE QE
• SEVERAL ON FOMC SAID FED SHOULD BE PREPARED TO VARY PACE OF QE
• FOMC PARTICIPANTS SAID ECONOMY WAS ON 'MODERATE GROWTH PATH'
• SEVERAL FOMC PARTICIPANTS SAW IMPROVED U.S. CREDIT CONDITIONS
• A NUMBER OF FED OFFICIALS SAID TAPERING QE MAY BECOME NECESSARY

Ultimately, Armstrong is very bullish on gold. Based on his models however, gold is not set to rally until the period between the 4th quarter of 2015 into 2021-2022 as confidence in government collapses.

I'm going to remain on the sidelines for now but certainly look to be buying back into paper gold positions over the next 2.5 years before the big rally begins.