There are many financial thinkers out in the market place like Bud Conrad who foresee the coming of the high inflation and high interest rates during the next decade. Needless to say, the focus would be on the choosing the most efficient vehicle for protection against inflation. While the Seeking Alpha contributor, Larry Mac Donald, suggests playing the uptrend in the US interest rates, I am not totally convinced by the case for interest rates.
In his interview with Bloomberg in June 2009, John Taylor, who is the father of the Taylor rule, said: “They say they’re using the Taylor rule, but they’re not. My rule does suggest a long time before we raise rates. But it also does suggest an earlier rate increase than you would think.”
I interpret these comments to mean that the rate setting process is not always objective, and it is heavily influenced by political objectives of the current administrators. For example, even though end of 2010 might be an optimal time to raise interest rates, Mr. Bernanke might delay this tough decision if it would then be politically unpopular.
Therefore, the flexibility and ability to raise interest rates are restricted by vote -- or popularity seeking politicians or officials. Against currency debasement, which is the practice of lowering the value of the currency at the expense of citizens, the best protection remains the precious metals. The price setting mechanisms for precious metals are more influenced by the free market forces than the power of the state. Therefore, precious metals are more reflective of the real situation than interest rates set by government-linked bodies.
As can be seen below, the prices of precious metals have performed very strongly since 1994, whereas politically-set interest rates have been all around, showing no logical pattern. In sum, in response to the expectation of increasing interest rates, precious metals rather than any instrument based on interest rates remain the effective investment vehicles. (Click to enlarge)
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Disclosure: Long Gold