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Yesterday we saw producer prices rise 9.2% year over year, as the PPI showed the largest increase since a 10.4% rise in June 1981.

So why hasn’t gold set new highs, and why is the US Dollar holding it’s bottom with those inflation numbers?

… simple answer - because inflation is a “lagging” indicator, and gold is a forward looking indicator.

Don’t think so?

Let’s take that June 1981 prior record PPI number and see how the price of gold performed from that point forward. Gold had printed its high much earlier in 1980, and as the PPI continued to rise over the next two years, gold continued its collapse.

PPI Chart

And here is how gold performed over that same time frame.

Gold Price

Of late, gold and commodity bulls have been placing bets on ramping inflation numbers, and their belief that Ben Bernanke continues to print money and expand the money supply at a record pace. Yet gold and gold stocks suffered a significant correction off the March highs, and have failed to print new highs.

Why?

Perhaps because the Fed really hasn’t been expanding the money supply to the degree most commodity bulls would believe. Here’s M2, the most widely accepted measure of money supply.

M2 Money Supply

And here is how the US Dollar has performed vs. Gold since the March 2008 highs for gold.

US Dollar vs. Gold

In the four months since the March highs for gold, and the lows for the US Dollar, even with 27 year highs in the inflation numbers, a systemic collapse in the financial markets, and new all time highs for oil, gold has failed to go higher, and the US Dollar has failed to go lower.

And now you know why…

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