Our favorite, not surprisingly, is gold, which this week reached 25-years highs against the dollar, clocking in at $588 an ounce on Thursday, settling somewhat on Friday to end at $581.80. Our customers have exchanged a lot of money for gold over the years, with generally spectacular results, and we are happy to report that our entire client base was ‘dollars ahead’ as this week ended.

Silver had a stellar time of it, and has increased in price over the past year some 60%. The traditional white monetary metal traded within a few pennies of $12 on Thursday, and finished the week with a 7% gain over the five trading days.

Since February 25th, the publication date of our article about the upcoming silver ETF and the likelihood that its introduction will boost silver prices, it has gained over 20%. This calendar year alone silver is up over 30%, due to a lot of support from both funds and retail investors alike.

Palladium, which was trading below $200 as recently as last October, hit the $350 mark on Thursday, finally settling at the $336 level. This oft-ignored white (actually, grayish-white) metal from the platinum group, is used in automotive catalytic converters, dentistry, and increasingly in jewelry as a stylish and affordable alternative to platinum.

Platinum itself traded over $1100 for the first time in its history, settling Friday around the $1080 level.

All in all, a week of stupendous price action for the increasingly precious metals, and for many other commodities. Oil prices soared above the $66 per barrel level once again, while copper, zinc and sugar all reached record high prices.

Which reminds us that inflation is a peculiar force. It rolls from thing to thing, from asset class to asset class, from commodities, to housing, to medical costs, to fuel, to food, and yes, in turn, to wages. Its source is the unbridled creation of that stuff that today passes for money.

“Ignore Money at Your Peril” headlines an article in the 3/25/06 Economist, expounding on the decision by the Federal Reserve to no longer compile and publish that broadest of monetary measures that was once known as M3:

“Once, a central banker who did not believe in monetarism would have been viewed as equivalent to a priest who admits to being an atheist. A quarter of a century ago, control of money was seen as both necessary and sufficient to curb inflation – so most central banks set monetary targets. Monetarism has since become unfashionable. Financial deregulation and innovation made the money supply harder to interpret, let alone control. As the link between money and prices seemingly broke down, central banks scrapped money targets and instead focused on inflation directly.”

The article quotes Milton Friedman that “Inflation is always and everywhere a monetary phenomenon.”

There is certainly a great deal of danger involved when a central bank ignores or downplays any useful measure of money supply and liquidity. Admittedly, the task of such tabulation involves a degree of difficulty best expressed in cliché – the phrases ‘herding cats’ and ‘nailing Jello to a wall’ come to mind. Nonetheless, because the Federal Reserve Bank holds absolute power over this amorphous entity that we call the dollar, any attempt on the Fed’s part to assert that dollar supply is just not worth the effort of measurement should give a sinking feeling to those who own a few dollars.

The implied assertion that somehow, in our modern financial age, “things are different this time,” is in no way comforting. The dollar suffers a host of structural problems, most recently demonstrated by the fact that US current accounts deficit reached a record 7% of Gross Domestic Product in the 4th quarter, and the US debt ceiling was raised to $9 trillion this past month.

The dollar simply lacks effective champions among those in position to offer more than just lip service to an empty ‘strong dollar’ policy. And do Americans really want a strong dollar, anyway? No, because they love inflation!

For instance, isn’t there a joy to be had in watching your house’s value go up, reinforcing in your mind the idea that you’ve made a shrewd investment? It’s certainly no fun to admit that a house is just a house - sticks, bricks or glass, sitting on dirt – and face the fact that rolling inflation just means that dollars are more plentiful, and does not mean that your precious abode has actually become any more precious.

This is the paradoxical false promise of inflation – we count our dollar ‘gains’ in what we own, and ignore the fact that every thing and service that we will purchase, for the rest of our lives, will be increasingly costly. Remember when you first learned about the magic of compound interest? Inflation similarly compounds, but not to your benefit.

In our current environment of ambivalence about inflation, whose job is it to keep the dollar strong? Unfortunately, the answer is, no one. Today you can search the marbled confines of the Federal Reserve, the storied halls and lobbies of Congress, and the various wings of the White House, and no where will you find the slightest inclination towards, or even an understanding of, monetary discipline.

And precious metals will continue to act up, as long as the dollar seems to be totally without adult supervision.