Is Gold Trying to Warn Us?

The recent crash in precious metals could be a short-term fluke, or it could be an early indicator of a much worse situation for the overall market, says Anthony Mirhaydari.

Talking about precious metals with Anthony Mirhaydari today. Hi, Anthony, and thanks for being here.

You're welcome.

So gold really went way up, way down, up a little bit, down again, and silver is not faring too well either. What do you think about the metals markets?

It's really been incredible. It was almost like a 1987-style crash for gold and silver, and everybody's trying to kind of figure out what the heck happened. I look at it as precious metals are an important indicator. Historically, it's given us data on what the Fed's going to do, what inflation's going to do.

So in that context if you go back and look at the severity of the decline, it's something that has been seen since the early 1980s when Paul Volcker came in and he raised interest rates over 20% and really killed inflation. Gold came down really hard on the expectation that, hey, they're getting it under control.

So how I interpret that is this could be one of three things. Gold could be telling us that the Fed's about to raise interest rates really aggressively, which probably is the least likely of the three.

Another option is we could be on the cusp of a deflationary scare, which would be...if we fell into a recession really hard right now, with inflation around 2% and kind of falling, we could have a deflation scare, which I think is unexpected by people right now. But probably the more likely scenario.

The third option is it was just some kind of fluke crash, like maybe a hedge fund blew up. Maybe we'll find out six to nine months from now what the heck happened.

But I think of the three, I'm increasingly concerned about the deflation option, because of what's happening in the Treasury market. What's happening with the measures of inflation, with Walmart (WMT) saying that they're seeing falling prices.

I don't think the market's really talking about that yet. But I think gold is trying to tell us that message, so we should listen.

Well, you know, it's interesting, Anthony, because usually when the markets are up so high, investors become very worried and uncertain, and that usually makes the price of gold go up. And it's so different this time.

Right. Gold is a funny thing. The supply is really determinant on the gold miners, and they're having a tougher time finding new supply. It's in really chaotic regions of the world

But demand is very...it's all about sentiment, it's all about emotion, and...I mean, there's some part of it that's industrial, some part of it like in India has a pretty steady demand. But the rest of it is just this big X factor.

So people get into it for inflation protection. They get into it if they're worried about currencies and the dollar, and they get into it if they're worried about like political risk, so, you know, maybe the Eurozone breaking up for instance would be an example of that.

So what if Bernanke pulls the plug and says, "OK, we're not going to buy any more bonds." What's that's going to do to the price of gold?

That would be, I think, the deflationary scenario. Where maybe they finally admit that, hey, the cheap money is not really generating the economic growth we wanted. I mean, they've pretty much nationalized the mortgage market.

So, I mean, they're getting to the point where they just can't buy anything else. And in that case it would be really ugly for gold and silver, I think. So right now the technicals are so weak. I would kind of like to recommend it, but it's...

Not there yet.

The charts look so terrible that you just have to steer clear until you get at least some stabilization.

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