Montreal, Canada

There's another big rally ahead for Treasury bonds this year as markets dislocate once again amid growing debt fears in Europe and how this will impact U.S. bank balance sheets. I think before this deflation scare is truly over, we'll see benchmark Treasury yields surpass the lows achieved in December 2008.

Also, a Greek default is imminent. The contagion from a sovereign Greek default will be enormous as it spreads to weaker peripheral EMU (European Monetary Union) members. Markets have not discounted this event. Greece signals the "beginning of the end" as investors draw the last straw on government debt exceeding national revenues.

As Mohamed El-Erian at PIMCO has stated repeatedly, a solvency crisis can't be checked indefinitely by liquidity as the ECB and IMF have implemented since announcing a $1 trillion dollar regional bailout of weaker members. At some point, a Greek default or debt restructuring will come into play. Others will follow.

It almost pains me deeply to even suggest investors purchase long-term U.S. Treasury bonds.

I've documented the frightening fiscal situation of the United States in this column on numerous occasions with spending clearly out of control since the financial crisis began in 2008. America's bulging deficits are now widely documented. The Fed's balance sheet has ballooned to more than $2 trillion dollars since late 2008 while the government has spent trillions more on bailouts, healthcare reform, mortgage tax credits – you name it. With no end in sight to the ongoing money printing blitz, why would any sane investor purchase long-term Treasury bonds – the most sensitive securities to changes in interest rates?

The reason we should buy long-term Treasury bonds is because we're pushing closer to the gates of deflation as the next phase of the destruction of credit lands on government door steps. I'm looking to buy 30-year Treasury bonds once the yield hits 4.5% (see above chart) or above. I do believe the next shock in the financial markets will take out the low achieved in December 2008.

But let's be clear about one thing: I certainly don't like Treasury bonds or most other sovereign government paper beyond the deflation hedge I'm anticipating. We're eventually going to see sharply higher funding costs for governments everywhere once deflation is licked for good; but the price central banks will pay will be enormous as paper money is severely compromised and, possibly, a new global exchange-rate system is introduced. Gold will play a role in this new regime.

Of course, the above scenario I'm painting is incredibly bullish for gold. Deflation and gold can run together. Gold is not just an inflation hedge but, more importantly, a store of value amid a breakdown in the exchange-rate mechanism, rapid accumulation of fiscal deficits and the eventual desperation we'll witness as deflation attacks government credit. Gold is the only asset that is outside the confines of the credit system. And that's worth a lot.