While oil and gold are thriving, most stock values have been dropping precipitously. The S&P 500 opened trading in 2007 at 1,418 and closed Jan. 9, 2008 at 1,409. Stocks have lost ALL the gains they made last year, and then some.

"Since the end of 2006, you'd have made more by stuffing your money into your mattress than by investing it into the broad stock market. And we're facing tough times for most stocks because stagflation is back," says James DiGeorgia, editor of the Gold and Energy Advisor

Stagflation describes an economy where costs are inflating, but economic activity is stagnating. "It doesn't happen often, but unfortunately the U.S. economy is teetering on the brink of it right now," continues DiGeorgia.

DiGeorgia points to the following conditions:

* Sales are dropping. This month's report from the Institute for Supply Management (ISM) was devastating. Its factory activity index fell to 47.7 - down three points in one month. (A value below 50 means manufacturing activity is contracting.) This is the lowest monthly index since April 2003, and this trend is accelerating. The ISM's index for new orders measures future business fell even more steeply - down to 45.7.

* Costs are skyrocketing. Energy and metals aren't the only raw materials with soaring prices. Agricultural commodities shot upwards; both wheat and soybeans rose more than oil (by 77% and 75%, respectively.) The ISM report said that 43% of manufacturers paid higher prices last month.

* Inflation is jumping up. The latest U.S. consumer price index had the largest monthly gain in two years. Producer prices were even worse - up 7.7 percent over the previous 12-month period.

"U.S. consumers are in trouble. Their assets are plunging - home values have plummeted and stock values are eroding. Many Americans are out of work, too. The last jobs report showed that private-sector payrolls were slashed by 13,000 jobs. This is the worst report since July 2003," says DiGeorgia.

In a recent conference call, Whirlpool CEO Jeff Fettig warned that 2007 "is the first year ever where we have seen a significant decline in demand in the U.S. and significant raw material inflation."

"There's no big secret here to profit from this situation," says DiGeorgia. "Just avoid the assets that are going down (most stocks and real estate) and invest in the assets most likely to go up (gold, oil). Gold and oil are great investments right now because they have been soaring even before full-blown stagflation arrived. Whether or not our government manages to avoid stagflation, inflation and other factors will still drive up gold and oil prices relentlessly for the next several years.

"A couple of years from now, I think we may look back and be amazed at how cheap energy and precious metals were in 2008," concludes DiGeorgia.