Here we go again. The Dow dropped 419 points yesterday as mildly worse-than-expected economic news caused investors to stampede for the exits. In response to the news — or perhaps in response to the plunge in stock prices themselves — the price of gold hit a new all-time high and bond yields hit a new all-time low.

You read that correctly. The 10-year Treasury note briefly dropped to as low at 1.99% before modestly recovering. Yes, these are the same U.S. Treasury notes that were downgraded by Standard & Poor’s two Fridays ago.

What are we to make of all of this? Are we careening into another volatile fall like 2008? Are we looking at another recession?

As the market was melting down last week, I advised readers to “embrace their inner Spock” and look at their investments rationally. It’s hard to keep your cool and stay composed when the world around you appears to have gone mad. But as investors, that is exactly what we need to do.

The U.S. economy might very well be slipping back into recession, and Europe’s sovereign debt crisis might very well be entering a dangerous new phase. But investors who run to bonds and gold are likely setting themselves up for a nasty reckoning.

Let’s start with Treasuries. I don’t believe there is a “bubble” in Treasury securities, per se, as there is a clear limit as to how low yields can go. They can’t go below zero, of course, though they have gotten a lot closer than anyone thought possible.

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Ever since the crisis began in 2008, bond bears feared that Federal Reserve stimulus and congressional deficit spending would cause yields to soar. It would be the 1970s all over again, minus the shag carpet. Yet three years into the crisis, yields just hit a new all-time low. What gives?

The bond bears failed to appreciate the effects of deleveraging and deflation that follow the bursting of credit bubbles. Had they looked across the Pacific at the example of Japan, they might have been better prepared. Fully 20 years after the bursting of the Japanese bubble, the 10-year Japanese government bond yields a paltry 1.1%.

I don’t believe we will ever see yields that low. The United States lacks the trade surplus and high domestic savings rates that helped to sustain the sub-2% rates that have persisted in Japan for so long. Still, we’re not going to see 1970s yields of 15% or more either. My best estimate of the “proper” rate is something in the ballpark of 3% to 4%.

When the current sense of crisis abates, yields should climb back into this range. Investors wanting to profit from that can consider the ProShares Short 7-10 Year Treasury ETF (NYSE:TBX) or the leveraged ProShares UltraShort 7-10 Year Treasury ETF (NYSE:PST). Given current bond yields, both have modest downsides and potential for a quick 15% to 20% rally.

While Treasuries may not technically be in a bubble, gold almost certainly is. Bubbles are driven by excessive greed and panics are driven by excessive fear, yet the current rally in gold appears to driven by a strange concoction of both.

John Maynard Keynes is not a very popular historical economist in this era of Tea Party angst, but Keynes did have one particularly insightful quote about how stock market speculation works. In his General Theory of Employment Interest and Money, Keynes compared the stock market to a newspaper beauty contest in which readers are asked to choose the most beautiful girl from a selection of photos. The readers who picked the most popular face would win. As Keynes noted:

“It is not a case of choosing those that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”

This is more or less where we are with gold. Investors buy gold not necessarily because they are afraid about the global economy but rather that they are afraid of other investors becoming afraid. Where does this nonsense end? No one knows. Gold first appeared to be irrationally priced to me at $1,200, and it has risen by 50% sense then. But then, in the late 1990s, the Nasdaq looked awfully expensive at 3,000 and it soared well above 5,000 before finally crashing. I don’t know where the final top for gold is, but I do expect the eventual crash to be every bit as spectacular.

Meanwhile, in the much unloved stock market there are some real values to be had. In cold, hard cash dividends, the Dow now yields considerably more than the 10-Year Treasury, and the S&P 500 isn’t far behind. And unlike Treasury interest, those dividends almost certainly will grow with time. U.S. companies also are sitting on record amounts of cash and, outside of the banking sector, have remarkably little debt. Recession or no recession, there are real bargains to be had. Investors wanting a good collection of solid dividend-paying companies with virtually no risk of long-term loss can consider buying shares of the Wisdom Tree Large Cap Dividend ETF (NYSE:DLN).

In the immortal words of Warren Buffett, investment success comes from being fearful when others are greedy and being greedy when others are fearful. Today, this means embracing the volatility. Keep your cool, avoid piling into gold and Treasuries, and load up on dividend-paying blue chips.

Charles Sizemore does not own any of the aforementioned stocks. Sign up for a FREE copy of his new Special Report: “3 Safe Emerging Market Stocks for a Shaky Market.”