How the University of Michigan is Increasing the Price of Gold and Silver

On Friday, The University of Michigan's report on consumer confidence was released.

According to the report, inflation expectations rose to 3.0% from 2.9%, the second highest figure in 2011.

Silver jumped nearly $0.30 in seconds to approach $36, while gold rose roughly $10.

Historically, inflation expectations have strongly correlated with the actual rate of inflation. Thus, the increase in inflation expectations of 0.10% month-to-month is in line with the actual increase of seasonally adjusted inflation of 0.20%.

However, inflation expectations are supposed to predict future inflation, not just mimic current trends. The Cato Institute reports that they do, but to a lesser extent. For example, when inflation was ravaging the U.S. economy in the early 1980s, inflation expectations rose, but never fully approached the levels of inflation seen during that period of time.

Likewise, inflation expectations did not predict the deflation the U.S. economy experienced following the financial crisis in 2008. Overall, inflation expectations appear to be much more stable than the actual rate of inflation.

Gold and silver have traditionally rallied during periods of high inflation. The metals are fairly limited in quantity and can not be counterfeited. Thus, investors may park their funds into gold and silver during times when the rate of inflation is high in order to prevent their purchasing power from being eroded.

The Federal Reserve has signaled that it does not intend to conduct a third round of quantitative easing. Some economic commentators have warned that a QE3 could trigger a significant devaluation of the U.S. dollar.

If those commentators are right, inflation expectations may be totally wrong.

In a recent poll, it was found that the majority of forex professionals do not anticipate QE3. If the results of that poll are in any way indicative of the broader population, a third QE would catch most off guard.

That could mean a high rate of inflation that was not anticipated.

Inversely, evidence is mounting that there are cracks in the broader global economy. China is struggling with its own inflation problem, while Europe is attempting to solve the Greek question.

Should the economies of Europe and East Asia break down, that might send the U.S. into a recession. It also might send foreign investors to the U.S. dollar. Both events might be deflationary.

The level of uncertainty present in the global economy demands a cautious approach.