Gold climbed to a new record high last week. Changing hands at more than US $1,380. Nobody seemed to think that this was excessively strange, except for the usual suspects hollering somewhere at the fringes of the Internet.

But, of course, it is strange. And it’s more than a little nerve-wracking for anyone trying to make sense of it all. Global equity markets are climbing, Treasury bond yields are flat, and the US dollar is in a state of free fall. And with the US Federal Reserve readying the printing presses for the next round of quantitative easing (dubbed QE 2), there will likely be more downside in the US dollar.

Especially when you consider that QE 2 is on top of a 222% increase in the US monetary base since 2000. Over the past decade, the U.S. monetary base has ballooned to more than US $2 trillion from US $621 billion. When you have that much new supply in a market with limited demand, is it any wonder gold has advanced nearly 400% over the same period.

It remains to be seen whether QE 2 will ignite GDP growth. More likely it will simply put another rocket under commodity prices. And not just gold. Any hard asset will do.

The prospect of QE 2 and the current round of US dollar weakness, has kick-started almost every commodity from corn to crude. Note the Reuters / Jeffries CRB Index touched the 300 mark last week, testing a level last seen in October 2008.

The problem is that commodity fundamentals have been shunted aside in the current price blitz. Crude oil, for example crossed US $81 per barrel last week, even as the Paris-based International Energy Agency forecast a decline in the rate of growth for world oil demand. Fact is, there is no supply demand metric that justifies oils’ current price.

But the real question centers on QE 2. Or more specifically, how much of QE 2 has been priced into the market. Certainly by any standard, equity markets have been driven by momentum. But when you look at recent weakness in US banks, and the foreclosure moratorium, you might question whether the rally is sustainable.

Given that, you might look at stock replacement strategies. For example, you could sell some of your profitable equity positions, and replace them with a long call option. You take some profit off the table, still have some upside potential, and any further risk is limited to the cost of the call.