Do Gold and Silver Prices Track Expected Inflation?

Former U.S. Federal Reserve Board Chairman Alan Greenspan (1993) mentioned the price of gold as an indicator of expected inflation:

Moreover, inflation expectations, at least by some measures, appear to have tilted upward this year, possibly contributing to price pressures. The University of Michigan survey of consumer attitudes, for example, reported an increase in the inflation rate expected to prevail over the next 12 months from about 3.75 percent in the fourth quarter of last year to nearly 4.5 percent in the second quarter of this year. Preliminary data imply some easing of such expectations earlier this month, but the sample from which those data are derived is too small to be persuasive. Moreover, the price of gold, which can be broadly reflective of inflationary expectations, has risen sharply in recent months.

As I recall, Greenspan was widely ridiculed for using the price of gold as an indicator of expected inflation. Back then there was no direct method of estimating expected future inflation. But beginning in 1997 the U.S. Treasury began issuing the Treasury Inflation Protected Securities (TIPS) whose principal are indexed to the Consumer Price Index. We can estimate investors' inflation expectations by subtracting the yield on a TIPS bond from the yield of a nominal U.S. Treasury bond of the same maturity.
The black line at the bottom of the above graph is our estimate of the inflation expectations over a 5 to 10 year horizon for each month from 1997 to 2006. Above that are the spot prices of gold and silver bullion. You can easily see the co-movements between the metals prices and inflation expectations, except for the period beginning in September, 2005 when the metals increased rapidly in value without any corresponding increase in expected inflation.
Anyone who is interested in this research may see our paper here.