This up-leg in gold and silver was first initiated by speculation about QE3, and then gathered steam after QE3 was announced. The announcement of the bond buying program from the European Central Bank (ECB) helped stoke the fires of the precious metal bulls.
Gold and silver investors should take notice of how the metals reacted to the announcement of Producer Price Index (PPI) data by the U.S. Bureau of Labor Statistics (BLS).
The BLS releases PPI separately for finished goods, intermediate goods and crude goods. For each processing stage, the BLS releases data for total PPI, foods PPI, energy PPI, and PPI except foods and energy.
The table shows finished goods PPI except foods and energy. In September 2012, finished goods PPI, except foods and energy, fell to 0.0% from 0.2% in August. The consensus of economists was 0.2%.
Finished goods PPI without foods and energy is also known as Core PPI. The reason Core PPI is considered one of the best indications of future inflation is that when producers are experiencing inflation, it ultimately spills into inflation for consumers.
Further, both foods and energy PPI numbers are highly volatile and including these in the analysis causes distortions.
Yes, we all eat and travel; therefore it seems intuitive to include foods and energy in the analysis. However, the data in recent years shows that when analyzing an investment thesis based on inflation outside of the foods and energy segments, it is best to use Core PPI.
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