Brian Foglia's  Instablog

Following last Tuesday’s nearly $40 tumble in the price of gold, there have been numerous cries from the financial media and the blogosphere that the “gold bubble” is finally about to burst. I disagree with these calls. Pundits are usually the last to acknowledge gold’s strength and the first to take delight in its stumbles. In fact, it takes only a basic understanding of economics to reveal the most likely outcome of the gold debate.
 

First, it’s worth pointing out that global economy has entered a long-term, secular bull market in commodities. Emerging economies across Asia and Latin America are undergoing their own industrial revolutions. The IMF expects developing Asia to grow by 8.4% in 2011. Latin America is projected to grow by about 4%. 
 

But that’s not the whole story. Besides the raw materials these countries will be demanding for industrial purposes, they will also be demanding more food, beverages, and consumer goods as millions of people lift themselves from poverty and become accustomed to a middle-class lifestyle. On top of that, the supply side of the equation only bolsters my optimism. Commodities markets are emerging from a long-term bearish trend. Many sectors have been neglected during previous decades because stock market bubbles have diverted much-needed capital from farms and mines into the hands of Wall St. financiers. 
 

Clearly the case for commodities in general is strong, but what about gold? Will it also benefit from this bull market? I think so. Gold is valued primarily as a medium of exchange. It is a form of money. The only difference between gold and a fiat currency like the dollar is that it is expensive to mine new gold but virtually costless to create new dollars.  This is why investors flock to gold during uncertain times. As you read this article, governments around the world are busy printing money to stave off their impending budget crises. As any savvy investor is aware, this can only lead to higher prices, harsher austerity, and greater uncertainty. Investing in gold is a way to protect your wealth from overzealous central bankers and spendthrift politicians. 

Don’t expect gold’s bull run to end until the fiscal emergencies plaguing the United States and Europe are dealt with realistically. Until politicians stop papering over the problems of the past, gold will continue to make new highs as the value of the dollar declines. 
 

Luckily, it’s not too late to join the party. Short-run corrections in the price of gold (like we’re seeing right now) are perfect opportunities to enter the market or increase your holdings.