At just over $1,000 per ounce, gold remains dirt cheap. If that sounds hard to believe, read on.

  • "What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment." --Alan Greenspan, former FED chairman.
  • "We are now into the ninth year of the current bull market in gold. We have had more investors buying more gold for a longer period of time than ever before. They probably will continue to buy even if the economy stabilizes." --Jeffrey Christian, CPM Group.
  • "Gold would have to reach $2000 to breach its inflation adjusted high set back in 1980." --John Osbon, Osbon Capital Management.

Derivatives are daggers to the dollar
Nouriel Roubini summarized his forecast for the U.S. economy as "death by a thousand cuts." If that's the case, then derivatives remain the razor-sharp blades.

According to Mark Mobius of Templeton Asset Management, the lack of liquidity and massive scale of the still-distressed global market for derivatives mean that systemic risk has not been cured by the enormous U.S. fiscal interventions (which I gave up tallying at $13.55 trillion). Mobius cautions that the response is simply no match for the $600 trillion mountain of deleveraging derivatives. After all, we're talking about a hitherto-unregulated marketplace that still dwarfs global GDP by a multiple of 10!

The Bank for International Settlements, a kind of central bank to the world's central banks, confirms this sober assessment. A little-publicized BIS report concluded that derivatives remain "major systemic risks" to the financial system. The British daily Telegraph's Ambrose Evans-Pritchard explains: "The misjudgement was to think the banks and insurers were safe because their "net" exposure was modest. That proved to be an illusion." When liquidity flees a market and deleveraging sets in, both sides of a trade face failure. Although we relearned this critical lesson the hard way last year, the remaining financial behemoths are right back in the same perilous derivatives game.

Something is fundamentally wrong with this picture; China knows it ... and that, in a nutshell, is why the dollar remains under such intense selling pressure. The projected U.S. budget deficit of $9 trillion over the next decade certainly isn't helping to dispel concern. Since the response strategy has already been chosen, additional trillions will be required to keep the financial system afloat, and a sort of stagflationary depression remains the most likely scenario that this Fool can identify. The looming inflation that must eventually result, I maintain, is purely a currency phenomenon ... one that is entirely distinct from inflation as it is traditionally understood. To fully explore how this all connects back to the bullish outlook for gold, I refer you to this two-part series.

Another critical piece of the gold puzzle is the finite scale of the physical market. John Osbon explains: "As we were investigating gold more closely our rough calculation of the value of all gold ever mined was about $5 trillion. That is a huge number, but not all that big compared to equities $60 trillion, bonds $15 trillion, or for that matter our government spending plans." In other words, the global gold market is surprisingly small relative to the scale of heavily leveraged private investment capital and modern governmental fiscal largesse. Since robust investment demand is chasing a small physical market, incremental increases in demand could drive impressive price gains going forward.

The golden opportunity
Understanding the complex macroeconomic underpinnings for the continuation of this multi-year bull market for gold is the hard part. Once you've made a decision to obtain gold exposure, determining how to invest is easy by comparison. The SPDR Gold Shares (NYSE:GLD) ETF is the largest bullion proxy by far, but not the only one.

While I anticipate at least a doubling of the gold price as the bull market matures, quality mining equities could perform better still after lagging the performance of bullion by a wide margin over recent years. As Newmont Mining (NYSE:NEM) CEO Richard O'Brien proclaims: "It's party time now versus a year ago when everybody was in self-reflection mode. The recovery has been pretty amazing."

Among the large-scale producers, Goldcorp (NYSE:GG) continues to earn this Fool's praise for its pristine balance sheet, low production costs, and robust production growth. My top stock pick for 2009, Agnico-Eagle Mines (NYSE:AEM), has notched a 38% gain thus far. Shares of Yamana Gold (NYSE:AUY) have tripled from their 52-week low, but remain at a 45% discount to their 2008 peak (despite achieving remarkable production growth).

Now that you're feeling rather bullish on gold, it's time to throw you a parting curve ball. The biggest market opportunity of all isn't gold at all ... it's silver. Thanks to an out-of-whack historical price ratio with gold, I contend that silver investors are bound to see a "slingshot effect" as silver closes the gap. Coeur d'Alene Mines (NYSE:CDE) presents a compelling growth story, but Silver Wheaton (NYSE:SLW) is the definitive shining star of the silver screen.

Another simple way for investors to defend themselves against dollar weakness is to look abroad. The Motley Fool Global Gains newsletter team is constantly scouring the globe to identify investment opportunities for Fools who wish to diversify out of the domestic markets, and they're ready to share their findings with you.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Agnico-Eagle Mines, Coeur d'Alene Mines, Silver Wheaton, and Yamana Gold. The Motley Fool has a gilded disclosure policy.