A few of you have asked me my opinion about Bonds. Let me first say that my "expertise" lies in the overall stock market, or more specifically the Dow Jones Industrial Average. The only thing I know for sure is that the Dow is about to experience the biggest crash ever.
As you may know, Bonds are an inflation sensitive investment. When inflation goes up, Bonds lose value. We have been entering into a deflationary environment for over a year now, and in turn, Bonds are doing very well. Many of my sources have been at odds when it comes to the whole inflation/deflation debate. Some swear there will be double digit inflation and that we will be paying $2.00+/gallon for gasoline. Others say that we are in a deflationary cycle. The answer is that they are both right, just over different time spans.
The reason that I am writing this is that after over a year of uncertainty about inflation/deflation, something has finally clicked. It was about a week ago, just after the Russian meltdown when I figured it out. Robert Prechter (Elliot Wave Theorist) has said that we are entering into a long-term deflationary cycle, just like the 1930's. He also said that there could be a short-term inflationary bounce. The thing that I never understood until now is why? Why would there be a short-term bounce of inflation? The answer can be found by looking at what happened in Hong Kong, Korea, Taiwan or any of the other Asian Countries whose stock markets have collapsed over the past year. We've just seen the same thing happen again in Russia. Russia's currency has collapsed along with it's stock market. Because the Russian currency has collapsed, the cost of goods has gone through the roof. In other words, the Rouble is now worth less than half of what it was, so now everything costs twice as much! It's like instant inflation, and it will happen here when our market crashes. One big difference here is that most of our food is produced locally so the cost of a loaf of bread is probably not going to double. What is going to get more expensive are imported items (almost everything else).
The value of Bonds will get murdered during this crisis. At the same time, gold should double in value, and gold mining stocks should do even better. The important thing to understand is that this is just a "bounce". I only expect it to last for about a year, until the Dollar stabilizes, and the deflationary cycle resumes. When this happens, it will be an excellent opportunity to buy Bonds. I like to think of it as an inverse '87 crash. Just replace the DJIA with deflation. In 1987 the long-term future of the DJIA was up, but it still crashed (inverse bounce), and it was one of the best buying opportunities for stocks this century. This time, the long-term future of inflation is down, but it will bounce (inverse crash), and will offer us one of the best opportunities to buy Bonds in our lifetime.
Gold is where money goes during a crisis. When people have no faith in any other investment, including cash, then they invest in gold. For this reason, I expect gold to at least double in value. At the same time, I suggest selling gold and gold stocks as soon as it has doubled. The reason for this is that deflation will quickly turn the tide against gold. During deflation, cash is king. Almost all other investments (save Bonds) will lose value during the deflationary spiral. I expect gold to bottom out somewhere below $200/oz. after deflation has run it's course.
In summary, sell Bonds and Stocks now, before the crash. Buy bonds when they are cheap about 1-2 years after the crash. Do not buy stocks again until the DJIA is below 1,000. Gold is a good thing to be holding now, but sell it about 1-2 years after the crash (buy Bonds). Some gold mining stocks might crash with the DJIA, so I don't suggest buying them until after the crash.