Spot gold prices closed the first three months of 2007 just shy of $665 per ounce, up 4.7% from the start of the year.

US and European stock indices, by way of comparison, were flat. Bond prices were also unchanged, with the 10-year US Treasury yielding 4.62% before inflation.

That leaves real yields at barely 2.2% on the official US measure.

But with Friday's data showing a sharp increase in the cost of living, many US citizens may also begin questioning the validity of Washington's numbers – and turn to gold as a way of defending a portion of their wealth. (Click here to find out why...)

Friday's data said that US consumer spending rose faster than forecast in Feb. thanks to rising gasoline prices.

"That left Americans with less cash for other goods," as Bloomberg reports.

The US Fed's preferred measure of inflation – the beautifully-named "personal consumption expenditure price deflator" (PCE) – was up 0.3% from Jan., the fastest rate since Aug.

And the US Commerce Dept. also said that personal incomes rose 0.6% in Feb. – twice the consensus forecast of a Reuters poll.

But any gains in personal income may well be eaten up by rising inflation in the cost of living.

And all this time, the ongoing crisis amongst subprime mortgage lenders looks certain to keep the Fed from raising US interest rates.

"I hate to speculate on the price range but I think very easily we can see $700 gold," said Stephen Orr, CEO of Oceana Gold, the Australian miner, at a conference on Thursday.

"We think that all the fundamentals that have supported the price over the last couple of years are still in place.

"Because of the inflationary environment in the world, cost has gone up. So that's kind of provided a new and higher floor for the gold price that didn't exist before."

The world's gold mining companies are now busy trying to secure fresh reserves of gold-in-the-ground. Newmont, AngloGold Ashanti and Randgold all said this week they're raising their exploration budgets dramatically.

But most of this higher spending is likely to end up digging for gold on the stock market, rather than funding new drill testing.

Mergers & acquisitions in the gold sector alone last year cost nearly three times the world's total non-ferrous exploration budgets. (Get the full story – click here now...)

Meantime, evidence of further inflation ahead currently litters the newswires. Associated Press reported on Friday that US milk prices could rise 9% by the fall, driven by higher fuel and feed prices.

Food prices charged by US producers have already risen 6.8% from this time last year according to Washington's official data.

Figures from the US Department of Agriculture also warn that the carry-over of coarse grain production from this year to next "could be the lowest – in relation to consumption – in decades," reports MoneyWeek.

And if – in response – "Wal-Mart and McDonald’s raise their meat prices month-after-month," says Donald Coxe of BMO Financial Group, "then consumers will be getting sticker shock weekly at the checkout counters.

"They will not be willing to accept Fed statements that inflation remains within acceptable ranges."

Why does the gap between inflation and interest rates matter to gold investors? Click here to read more...