Last February, I made my first and only investment recommendation: silver. So far, it's been going very well. I bought when the price of silver was around $13 an ounce. Today, 10 months later, it's selling for around $19 an ounce.

So why am I not happy? It probably has to do with the fact that the market is already pricing in the deteriorating value of the dollar. Silver (and gold) have risen substantially because many investors are afraid of the potential for inflation from the Federal Reserve's massive expansion of its own balance sheet in order to stimulate and bail out the economy. So far, it hasn't happened. Fed governors, including Ben Bernanke, routinely trumpet the fact that inflation is running at all-time low levels.

So why hasn't inflation taken off? Very simply, it's because the banks haven't been lending out the money. Instead, they've been using it to cover their massive losses. Thus, the fractional reserve effect that comes from lending money, having it redeposited in other accounts, then being used to loan it out even more hasn't kicked in to any significant degree. Until that happens, inflation won't happen. More accurately, the inflation has already happened, but it won't kick in and make itself apparent until all that added money gets used.

This phenomenon is where monetarists like Milton Friedman get their concept of "velocity", which they like to claim causes inflation. In fact, it does nothing of the kind. It merely causes already created inflation to kick into gear, inflation that was just waiting for someone to spend the new money in order to appear as higher prices. Velocity, the rate at which money circulates, doesn't cause inflation. It merely causes already existing inflation to show up in prices quicker or more slowly, depending on the velocity level.

Getting back to gold and silver: what's the future? I'm with those who think that both will continue to do well for quite some time, but silver will do better. At least, I hope it will, because it's going to be the only way, in the long run, to offset the deterioration to the value of the dollar that is already occurring. Oh did I mention that the dollar is deteriorating? Yeah, it's actually down to levels below where they were when the crisis of 2008 began. Fancy that. Despite all the investors, all the governments, all the brokers who rushed to the dollar as a hedge against bad times, the dollar still managed one year later to actually lose net ground. Who'd have thunk it? Certainly not the apologists for the money suckers.