Gold and silver have been resilient. Investors in precious metals clearly saw through the recent 'tough talk' of Obama. Smart investors realize that we face years of financial turmoil in the US - even if it's able to avoid a debt crisis or potential default. Although the pull backs at the beginning of last week were a harsh reminder of how fragile the markets can be, it doesn't bother us in the slightest.

We are not saying Goldman is completely wrong in its predictions given that many commodities have been long overdue for a pullback. Our belief is that Goldman may be right on a handful of commodities in the short term, but grouping them all together as one asset class set to fall is a mistake.

Commodities are volatile in nature and many could easily pull back 10 or 15% as we head into May and the summer months, but we still remain in a secular bull market - nothing goes straight up.

During market gyrations it is important to remind oneself of a simple question:

How did we get here?

How did we get to record highs in gold and most commodities?

The catalyst prior to the 2008 crash was the emerging markets, and in particular, the insatiable growth of China. Emerging markets are still expecting to outperform, with high GDP numbers across the board. The second and strongest reason for record high commodity prices is, without question, the demise and falling value of the US dollar. Although the US dollar recovered a tiny bit following the not so big budget cut, the US dollar is in as worse shape as ever and expected to head lower by most credible analysts. The prolonged, low interest rate, free money environment has also fuelled much of the rally in commodities to date and has further fuelled the decline in the US dollar.

Obama recently vowed to cut $4 trillion in cumulative deficits within 12 years through a combination of spending cuts and tax increases. Key words being 12 years.

The government barely agreed to muster up $38.5 billion in cuts recently to avert a government shutdown! Where does Obama get a $4 trillion cut from? The fact is, the deficit is increasing this year by roughly $1.5 trillion and by more than $1 trillion in 2012. Obama's administration has already reported that its government will pile up a cumulative deficit of $3.8 trillion over the next five years. So when does this $4 trillion in cuts begin? After the US has piled on another $4 trillion in debt?

This $3.8 trillion expected to be piled onto the deficit will take the US well beyond the 100% debt to GDP ratio. Most economists argue this is basically a point of no return and the chances of paying off the debt is very unlikely.

The budget tells us that the debt ceiling will have to be lifted next month. This will be a huge benefactor to commodity investors and those short on the dollar as it will spark reduced negative sentiment towards the greenback.

Both of the fundamental reasons which brought us to this point in the markets are still intact:

1.) The continued strong growth of the emerging markets
2.) A declining US Dollar.

The long-term secular commodity bull market is still intact. A secular bull market, by definition, has corrections and sometimes very sharp corrections on the way up. We are still in the trend and believe it will take the United States a minimum of 3-5 years to resolve its debt issue. As commodity investors, this is very bullish.

As QE2 comes to an end, we believe the markets will have to focus more on growing demand from the emerging markets. If the markets begin to sell off too sharply and unemployment stays high, we will expect another round of monetary easing. The IMF reported on April 11th 2011 that BRIC countries will continue to see robust economic growth in 2011.

The global output is projected to increase by 4.4% this year, while emerging economies are expected to rise by 6.5%. The IMF made these projections in the most recent World Economic Outlook report.

The IMF was quoted as saying, "As leading emerging economies, the BRICS countries, which is the combination of Brazil, Russia, India, China and South Africa, will continue to outpace other countries."

China's economic growth is expected to remain at 9.6 percent this year and 9.5 percent in 2012. China will continue to lead the BRICS nations and emerging market demand for commodities. India is also expected to put up solid numbers in 2012 with 7.8% growth. China and India continue to deliver demand to the commodities markets.

As QE2 comes to an end in June we are expecting an increase in liquidity across the markets as traders begin to make bets prior to the end of stimulus. If the US Dollar continues to show a bit of life amidst government promises decades into the future, it could also throw a wrench in the short-term commodity trade; but it's nothing to worry about. QE3 is going to happen at some point, they just might give it a different name.

Gold continues to be underweight in most portfolios and not in a bubble. In late 2010 Eric Sprott estimated that the actual amount of new investment into gold since 2000 is about $250 billion. Compare that to the roughly $98 trillion of new capital that flowed into other financial assets over the same time period. From 2000 to 2010, $2.5 trillion flowed into U.S. mutual funds, but only $12 billion of that went into precious metal equity funds.

It takes years for a bubble to reach its peak and burst. Gold is not there yet. Gold remains heavily underweight in many institutional portfolios and will continue to rise in value as the US debt crisis approaches.

All the best with your investments,