I was thinking to myself this could be heaven or this could be hell.

- The Eagles, Hotel California

That is what it feels like looking at the gold and silver markets today. While many experts attribute today's swoon to a) a rise in the dollar; b) outside bearish markets; or c) various short positions found within big investment houses. Really "none of the above" is applicable.

A better analysis would look closely at the continuing avalanche of bullion being dumped by ETFs and an attendant lag in a countervailing purchasing surge in the private and governmental sectors. How long will those two groups be able to resist what are again becoming bargain-basement pricing? 

Not long, we believe, although some large portion of  those kinds of buyers will hold on, thinking that prices will go down to the 1320 range again. One also has to wonder if many of the small buyers in the April downturn haven't been selling their purchased bars and jewelry. We know that sovereign funds that have been fattening up their holdings in the last three weeks certainly haven't been selling.

Yet, an even bigger story is behind today's sell-off. (One can also presume that there was foreknowledge of it yesterday by big players that pushed gold and silver down.) We are referring to the Congressional Budget Office (CBO) report that says the U.S. deficit will shrink much more rapidly and much more deeply than previously predicted.

The deficit is largely repairing itself, says the Congressional Budget Office. A mere three months ago, the CBO projected that the current-year (2013) deficit would be $845 billion -- about 5.3 percent of economic output. Now the projection is for it to be around $640 billion, getting within the manageability range. The New York Timessaid:

"The $200 billion reduction to the estimated deficit comes not from the $85 billion in mandatory cuts known as sequestration, nor from the package of tax increases that Congress passed this winter to avoid the so-called fiscal cliff. The office had already incorporated those policy changes into its February forecasts."

For precious traders this means there is a higher likelihood that interest rates will rise, the anticipation of which is bound to further throw the equities traders into a more savage buying frenzy. (They will want to borrow more heavily quickly so they can invest in stocks before interest rates go up.) It also means that there is going to be an extra $200 billion chunk of money thrown into the private sector, which might lead the Fed to now seriously consider scaling back QE3.

The flip side of this scenario could possibly give us quick-moving inflation. It's hard to tell because the CBO has yet to tell us where exactly the $200 billion in savings is going. Into whose hands? What will they do with it? Hopefully into Mr. and Ms. American Consumer's hands. (A side question: will Congress restore some cuts from the idiotically harsh sequestration legislation?)

Higher inflation numbers would certainly be welcome at this point for precious metals bulls.

Hard to determine, now, though: Heaven or Hell? 

  As always, wishing you good trading,