Jerry Bower has a reasonable explanation for why high gold (and other commodity) prices may not indicate imminent inflation.
Here's a good fundamental question: why gold? The point of a gold standard currency is to keep governments from cheating their citizens. This goes all the way back to Moses: "a just weight and measure thou shalt keep." Paper can be produced in nearly infinite supply, electrons even more so, but gold is scarce. The basic case for gold is that we get better at producing it at about the same pace that we get better at producing everything else. In other words, our gold output usually grows at about the same rate as our everything-else output. There's the rub: usually. However, sometimes gold -- and other commodities -- grow at different rates than the rest of the economy.
From the 16th century to the 18th century, gold came flooding into Europe from North America. Explorers discovered the Western Hemisphere, plundered the Indians' gold supplies, and shipped boatloads of the stuff back to Europe. Because of exploration and (then) modern shipbuilding, the European economy got much more efficient at gold 'production' than at everything else. So, even countries with a gold-based monetary system were hit with many years of inflation. Their money supply grew more quickly than their economies.
I think that we currently face the opposite scenario. We're not much better at getting gold out of the ground than we were last century, but we're much better at getting wealth out of electrons. Our economy can now grow at a faster pace, by far, than the mining industry can. Our economy now grows faster than our gold supply. This means that gold prices, reflecting gold scarcity, will be an imperfect messenger.
Sounds right to my naive intuition. I'd guess that unlike times past, a good proportion of American wealth is stored intangibly, in things like education (degrees, experience, specialized knowledge) and intellectual property. We're producing knowledge-wealth at an exponentially increasing rate, and the production of gold simply isn't keeping up.
So, how can I make money if it appears that many people are expecting inflation to go up, but I don't think it will? Are there any investment instruments I can use to profit from this situation?
(HT: Larry Kudlow.)