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Even though it has been barely two years since the last investing bubble burst, bringing companies like American International Group (NYSE: AIG), Fannie Mae (NYSE: FNM), and Freddie Mac (NYSE: FRE) to their knees, there's yet another bubble forming. And I believe it will burst in 2010.  

Just ahead, I'll tell you how to completely avoid it -- and present an alternate investment strategy you can adopt instead of following the crowd into this bubble.

But first, a look at this bubble and how it formed.

All that glitters
Congress is spending billions of dollars in stimulus funds to jump-start the economy. It's funded almost entirely with debt. As the national debt level rises, the dollar becomes weaker because currency investors shy away from high-debt countries. This causes higher inflation, which everyone agrees is coming.

But the consensus right now is that the best way to counteract inflation is by investing in gold.

And the consensus is dead wrong!
The problem with gold is that it's a luxury commodity. It has no coupon rate or growth prospects, and it can rise in price only as much as demand for it grows.

It's also difficult to value. Some believe the price of gold per ounce should match the Dow Jones Industrial Average. Others believe it must reflect the price of a top-tier man's suit. Still others believe it must account for global supply and demand.

In spite of this inherent confusion, many prominent investors -- John Hathaway of the Tocqueville Gold Fund, Jim Rogers of Quantum Fund fame, and even hedge fund manager David Einhorn, to name a few -- believe gold can do well right now. What's more shocking: The recent Value Investors Congress was full of lectures on how to profit in precious metals.

Even the best can be fooled
The average investor is blindly following these noteworthy men. That's why more than $12 billion of new money has been invested in the SPDR Gold Trust this year alone. I'm the first to admit that falling prey to other investors' moves is an easy pitfall -- but it can also set you up for disaster.

So what exactly are all these investors -- and their followers -- overlooking? These three facts:

1. When gold demand rises, supply does, too, which brings gold prices back down.
Fortune magazine reports that gold miners invested more than $40 billion into new projects since 2001, and they "are now bearing fruit." Bullion dealer Kitco "predicts that these new mining projects will add 450 tons annually -- or 5% -- "to the gold supply through 2014, enough to move prices lower." The demand also brings out sellers of scrap gold, which adds even more to the supply.

All this while demand for gold has dropped 20% in the past year.

2. Gold is not just dollar-denominated.
Unlike oil, gold is bought and sold in local currencies throughout the world. The Wall Street Journal reports that "gold remains well below last winter's peaks when priced in pounds, euros, yen, or Swiss francs." This indicates that it is solely Americans speculating on gold's rise.

3. Gold is historically a poor investment.
Perhaps the most damning fact is that, from 1833 through 2005, gold and inflation had nearly perfect correlation, according to Forbes. This means that, after taxes, you would have actually lost money in gold.

Warren Buffett once quipped, "It gets dug out of the ground ... Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head."

In fact, the only way to make gold rise is to get other investors to buy into the idea -- like a giant Ponzi scheme. And as we know from watching the unraveling of Bernie Madoff's empire, this can't last forever.

Which is why buying gold today is a horrible decision -- and why investors would be better off looking elsewhere.

The absolutely best place to be looking
The best way to invest for inflation is to invest in high-yield dividend companies. Unlike gold, which has no coupon rate and no growth potential, you should be sending your investing dollars to companies that pay a dividend (which often rises) and also have both stable growth potential (which also often rises) and strong assets (in inflationary periods, assets are more valuable since they cost more to replace).

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With gold hitting $1,000 per ounce today, many believe that the sky's the limit for the yellow metal. If you're thinking about buying gold now, though, you need to understand the risks involved.

Us vs. them
It's hard to find objective analysis on gold. Many die-hard "gold bugs" seem to feel vindicated whenever gold prices rise, while decrying the markets as irrational when prices fall. Meanwhile, market investors often mock gold bugs for putting so much faith in the metal, arguing that other investments give better potential for both income and growth. As one who understands both sides of the argument, I'm going to try to approach gold from an objective point of view.

Gold has traditionally been a hedge against inflation. In my opinion, though, we currently have stronger deflationary pressures in the economy. While deflation could result in a rally in Treasury bonds and the U.S. dollar, it would also likely bring a fall in commodity prices. Gold bullion could see its price fall substantially from current levels.

You cannot print demand
Much has been said lately that "printing" by the Federal Reserve and other central banks will result in above-average inflation. This is absolutely true, but the key is when. I don't believe that inflation will show up at any point in 2009, and it very well may not show up in 2010 either, given the collapse of securitization markets and the resulting decline in credit available in the U.S. economy.

At the same time, overall demand for gold hit a six-year low, according to the World Gold Council. In the second quarter, global consumption fell 8.6% to 719.5 metric tons compared to 2008, to the lowest level since the first quarter of 2003. Falling demand for jewelry (down 22%) and electronics manufacturers (down 26%) was partially offset by rising demand from gold investors (up 46%).

As you can see, even enthusiastic gold bulls cannot push the market higher if other sources of demand are falling. It is true that central banks were net buyers for the first time since 2000, which should be the main driver of gold bullion in the future. But if the current economic stabilization turns out to be just an inventory rebuilding cycle, and the economy weakens again in the fourth quarter or in early 2010, gold demand is likely to stay suppressed. The dollar will likely rally again and so will Treasury bonds -- no matter how much the investment public hates bonds at present.

Why $200?
To get a sense of how big a correction might be, let's take a look at gold's trading range in recent years.

Year	High	Low	Range $	Range as % of High Price
2009	1007.7	801.5	206.2	20.5%
2008	1033.9	681.0	352.9	34.1%
2007	848.0	603.0	245.0	28.9%
2006	730.4	503.8	226.6	31.0%
2005	541.0	410.4	130.6	24.1%
2004	456.9	371.3	85.6	18.7%
2003	418.0	322.1	95.9	22.9%
2002	350.5	276.7	73.8	21.1%
2001	294.0	255.0	39.0	13.3%
			Average	23.8%

Sources: Thomson Reuters, author calculations.

With the average drop between a yearly high and low of about 23.8%, a drop from current prices around $1,000 per ounce down to $800 would be well within historical norms. Such a $200 drop wouldn't necessarily spell the end of the longer-term bull market in gold, but rather would constitute a correction.

A $200 decline = a buying opportunity
If gold does decline by $200 per ounce, I believe it will present a buying opportunity -- but only for the right investments. In my years of investing, I've too frequently seen investors chase the worst kind of stocks: small, unprofitable miners with only a nebulous promise to produce gold some day. Such small mining stocks tend to decline at a much faster pace during corrections. I've seen many 70%-80% declines in small gold mining stocks over the years. High-profile examples in past years include Coeur d'Alene (NYSE: CDE) and DRDGOLD (Nasdaq: DROOY), both of which failed to advance over long periods despite big run-ups in silver and gold, respectively. Both issued a lot of stock without producing the profits they promised and declined well under a dollar, before being forced to do reverse splits.