Caution: Gold Prices Are About To Soar

"Change is inevitable. Growth is optional"

― John C Maxwell

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Equity markets are falling and gold prices are rising.

We’ve been vocal that this would occur for some time now.

But tonight, we explain why we are so convinced that this seemingly inevitable outcome will likely continue.

This is not about Russia or China. This is not about geopolitical risk. This is about monumental investor repositioning brought about by the recognition of the challenges presented by a central bank that is well behind the curve.

After nearly 15 years since the global financial crisis, 12 of which have seen interest rates pinned at 0%, central banks around the globe are changing direction. This is not because they want to. It is because inflation is forcing their hand.

This change in direction by the Federal Reserve is changing the direction of capital flows as a result.

In our opinion, this is not a “dip” to buy stocks and bonds. The Federal Reserve giveth and the Federal Reserve will taketh away. While we anticipate large swings in volatility in the coming months, we are very confident that markets will wind up significantly lower over time as the Federal Reserve is forced to act.

The reasons for the volatility are simple. They’re the only reasons markets are ever volatile…

Fear and Greed.
Fear Of Loss and Fear Of Missing Out

To put it mildly, investors have enjoyed the most accommodating Federal Reserve in history. That accommodation is the entire reason for the dramatic move higher in the markets since March 2020.

But now the smart money is leaving the market.

And it’s not because of our economy. Or because of growth. This is not about anything but one thing: The Federal Reserve and Congress flooded the system with money. As a result, markets exploded higher.

The smart money understands that the same accommodation that caused it all to go higher is now going away. The Fed is stuck. Inflation is forcing their hand, and they must do something about it all or risk losing all credibility. Higher rates are coming. The free money party is now over.

This was the point made by St. Louis Fed President James Bullard in his widely watched CNBC interview this morning. Bullard repeated that he would like the Fed to raise its policy rate by 100 basis points by July 1 to start the effort to bring down inflation. “I think we can do it in a way that is organized and not disruptive to markets,”

But at the very moment Bullard was talking super tough, the Federal Reserve was still buying assets. At the same time that Fed members have been promising to do something, they are doing nothing.

This is what is keeping the FOMO crowd engaged. Those hoping for a massive melt-up are watching what is being done, not what is being said. Bullard promised, “the Fed is only moving away from its ultra-easy policy stance and is not moving to contractionary policy.”

What few understand is that the tremendous leverage sitting within the system simply cannot handle higher rates. At least not while maintaining today’s unsustainable and lofty valuations.

Which means the smart money is leaving because, well… they’re smart. The retail crowd is hoping for one last hurrah, because, well… this is what retail investors always do.

The Federal Reserve is pinned harder than interest rates have been. The incredible powers that they have exhibited over the last decade have been revealed as what they always were; steroids.

The Fed cannot create growth. They can only create money. Money creation looks like growth until indebtedness overwhelms. This is where we are today.

The entire “boom” in the markets over the past 23 months is because of massive money printing and debt expansion. Unfortunately, every action has an equal and opposite reaction. Investors hoping the Fed will save them once again are underestimating how powerless the Fed has now become. Inflation is too real to ignore.

This is precisely what we have been warning would occur. In fact, nearly every blog post since December has offered warnings to investors. (For your convenience we are providing links to each blog post.)

This is the macroeconomic picture in a nutshell, and absolutely not a bullish environment for equity markets. However, as bearish as we are for paper markets, we have never been more bullish for higher gold and silver prices.

Don’t mistake this as our being focused on the smart money’s fears. We are far more focused on the smart money’s greed.

Greed – Higher Gold Prices

We believe that gold prices are on the verge of a dramatic breakout to the upside. It’s our research that has had us bullish on gold for the last three and a half years, and it’s our research that has us uber bullish right now. Brentwood Research began with a focus on answering one simple question: What really drives the price of gold?

For the longest time, the conventional wisdom was that higher and higher levels of government debt and bigger deficits drove the valuation of gold higher.

In fact, up until about ten years ago, there was a single metric that had become the presiding model for gold prices. It stated that for every trillion dollars in new debt, the price of gold would rise by roughly $100.

From 2000 through 2010, our national debt had grown from $5 trillion to $14 trillion. This steadily rising debt witnessed a steadily rising gold price. The subsequent rise of $9 trillion in debt over the decade coincided with a near $900 rise in the price of gold during the same span. Gold prices, which were $270 per ounce in ‘00, rose to $1191 in ‘10.

The metric for higher debt and higher gold prices worked so well that it even worked in reverse.

Lower debt levels meant lower gold prices. History supported this math. From 1996 to 2000, under the Clinton administration, the United States actually ran budget surpluses. The surpluses during this span witnessed the price of gold drop from $400 per ounce to $250 per ounce.

This made determining the future price of gold easy. When we reduced our national debt and ran government surpluses, gold prices dropped. When we expanded our debt and had higher budget deficits, gold prices rose higher.

However, this correlation was broken all at once in 2011.

Initially, in 2011, gold prices soared to highs of $1900. This occurred when Congress refused to raise the debt ceiling, and United States credit was downgraded by Moody's and other credit rating agencies.

Thereafter, the correlation broke the opposite way. Once it became clear that the Federal Reserve would continue QE as an indefinite and ongoing policy tool, gold prices steadily dropped over time. For the first time in 15 years, this fall in gold prices coincided with a national debt that continued to increase, causing many to abandon the idea that gold prices were impacted by our nation's debt.

From 2011 to 2016, our national debt continued to rise from $14 trillion to $19 trillion. This occurred while gold prices dropped 50% from highs of $1924 in 2011 to lows of $1060 at the end of 2015.

This break in correlation meant that what had once been a widely accepted model associating higher levels of debt with higher prices in gold, was tossed out for good. The new thinking was that there was little correlation between the two, and that higher and higher levels of debt really didn’t matter to the future price of gold.

A great many macroeconomic experts are still suggesting that to be true even today. It’s not hard to see why. Gold prices today are below the price levels they reached in 2011, while our debt has since doubled.

Theoretically, gold prices should move in correlation with the value of the dollar. This is because while we are no longer on a gold standard, gold is still the standard by which our dollar is measured. It seemed only logical in 2016, as the United States took on more and more debt that it would put more and more pressure on the dollar, and, would therefore lead to a higher gold price.

But the theory didn’t work in reality.

For the five years from 2011 through 2015, our national debt exploded 40% higher. During the same period, gold prices dropped nearly 50%. This is when most people lost faith in gold.

It’s been said that necessity is the mother of all invention.

We were so perplexed by the diversion between debt and gold that we focused our research on this one specific topic. Ultimately, Brentwood Research was formed from the passion to answer one question: why did gold prices drop for five years while our national debt exploded higher?

Our analysis looked at several decades of debt and gold prices. What we learned was that the two were indeed correlated, just not in the way that most had believed. We identified a big mistake in the way most experts were evaluating gold prices.

That’s why in 2016, when macroeconomic experts like Harry Dent were calling for gold prices to continue their slide and end up below $600, we began our argument that gold prices would rise significantly.

Our conclusion was that it wasn’t the total debt that mattered to the price of gold, it was actually the costs to service debt that mattered most. It’s a distinction that nobody had identified, but the math indicated was true for the 20 years prior. In nearly every year between 1995 and 2015, that our costs to service debt rose higher, gold prices rose higher. In the years during that span that our costs to service our debt dropped, gold prices also dropped.

The big idea for Gold Is A Better Way was born. It wasn’t national debt that drove gold prices, it was the costs to service the debt that did.

The stunning realization was made obvious by bottom-line numbers. In 2011, it cost $452 billion to service our country's debt. Five years later, with our debt 40% higher, it only cost us $402 billion.

The drop in costs to service debt coincided with the drop in gold prices.

We concluded that what really drives gold prices is not higher deficits and higher debts, it’s higher costs to service the debt. As our research expanded into a deeper dive, into the way credit works, our study of the housing bubble that had collapsed in 2007, and the corporate credit bubble that was rapidly expanding in 2016, the concept became a deeply held conviction.

Simply put, lower rates allow for lower payments even while total levels of debt increase.

We surmised that while the United States had obviously been expanding her debt, our dollar had actually strengthened as this occurred. This was because our ability to service our debt had gotten better. The conclusion was easy once we understood the reason behind it all. By 2011, zero percent interest rates had become entrenched. This led to a lower cost to service the debt for the next five years, even as our debts exploded higher.

We were so certain of the conclusion that we began creating content extensively devoted to the topic. Our blogs and vlogs became the foundation for the book Gold Is A Better Way.

The title was bold because our conclusions would be forced to stand the test of time on their own merit and without qualification. We would either be proven right or proven wrong. In choosing this title we were effectively saying two things. Firstly, we believed gold prices would rise dramatically. The second argument was highlighted by the subtitle of the book, And Other Secrets Wall Street Doesn’t Want You to Know. Our bold prediction was not just that gold prices would rise, it was also that gold prices would rise more than stocks and bonds.

We argued that our massive indebtedness actually made gold a growth asset rather than only a safe haven insurance policy. We were sure that it was all about to turn because the Federal Reserve was raising interest rates in 2016.

This meant two things. Costs to service our national debt would increase, and overleveraged stock and bonds markets would likely lose value as interest rates continued higher over time.

We believed the exact monetary financialization that had helped the United States drive her costs to service debt lower, were the exact thing that had allowed stocks and bonds to rise, as well. Our reasoning was that once interest rates rose to levels that pressured the massive corporate bubble, stocks and bonds would suffer significant losses.

And then the coronavirus interrupted everything. The pandemic became an excuse for the central banks to immediately double the size of tier balance sheets and return interest rates to 0%. This is precisely what we predicted would occur.

We all know what has happened since.

Here we are again. The central bank is now more committed than ever to raise rates. But if our research was on point before the pandemic and when our national debt was only $20 trillion. How much better is it today now that the Federal Reserve is now tightening into a $30 trillion national debt?

Our deep conviction of what comes next is not based on fear or propaganda. It comes from a crystal clear understanding of the coming moves of the Federal Reserve. They have no choice but to act. Inflation is revealing the truth.

Gold Is A Better Way began with a simple premise. Gold prices would rise faster than stocks and bonds. Our promise was to keep score so that we could measure the results.

This one promise has been the core driver for the goldisabetterway.com investor platform, which now has thousands of subscribers and has helped Brentwood Research become one of the fastest-growing financial publishers in the country. It’s the very first thing people see when they come to our website.

The performance below is as of today – Valentine's day, 2022.

Since the book Gold Is A Better Way was published three and a half years ago, gold and silver prices have outperformed the Dow Jones by 20% and the S&P 500 by 2%, and have outperformed the universally accepted 60/40 model by more than 10%.

We remind our readers that we are only a third of the way through the timeframe of our prediction and are already winning. We aren’t claiming victory yet, but we have never been more certain.

What we are now predicting about the future is that gold prices will rise 250% in the next four years and hit more than $5000 per ounce by Christmas 2025. This will occur, we believe, while the equity markets will be down 25%-35% from their all-time highs at this same stage.

Every ounce of our research supports these projections.

If we are correct, it would mean that gold will outperform the 60/40 model by a rough margin of five to one over the next five years. Our research on costs to service debt as it applies to both paper assets and gold prices is critical to understanding the depth of our certainty.

Recognize that from 2016 to 2021, while our Fed Funds rate averaged 0.96%, our costs to service debt increased from $432 billion to $562 billion.

Despite minuscule interest rates, our costs to service debt have increased in the last five years because our overall debts have exploded from $19 trillion to $30 trillion today.

As this has occurred, gold prices have risen 80%. But this explosion in debt was facilitated by the very same thing that has facilitated an explosion in asset prices; incredibly low rates.

Remember there are two aspects to our thesis.

Rising rates will be a catalyst for higher gold prices and they will be a big headwind for paper assets. The best part as we see it? The latter, (lower stocks and bonds) will actually propel momentum into the former (higher gold prices).

The reality is that nothing happens in a straight line, and the conclusion will only be validated with time. Our track record thus far continues to be our guide. We will continue to keep score for our subscribers.

We point out that the Federal Reserve managed to effectively hike interest rates for three years from 2016 through the end of 2018. During this timeframe, stocks performed quite well. The Dow Jones rose 25% during these three years, lending confidence to those who want to believe that equities could see a similar growth trajectory over the next three years.

We doubt stocks are headed higher. Don't be fooled into thinking what happened then will happen again as the Fed hikes rates.

Much of the gains from equities during the last Fed hiking cycle can be attributed to the deregulation and tax cuts of the Trump administration. No such tailwinds are present today. In fact, we can expect the opposite in the coming years, which doesn’t bode well for equities. The one remaining hope that equities had was the massive fiscal stimulus from the Build Back Better program, which is now dead on arrival.

If stocks are facing headwinds, bonds are even more disadvantaged, especially in the short term.

The Federal Reserve is now nearly forced to raise rates. Inflation has become a politically damaging reality and must be addressed. The market odds that there will be six rate hikes in 2022 are now more than 50%.

While the Fed is promising inflation will fall, it’s hard to see how it can fall anywhere near enough to justify interest rates below a Fed Funds rate of 1.5%. This is not to say we agree with the market that the Fed will raise rates to these levels, only that if they did, bonds would still guarantee losses to inflation, which will be decidedly higher.

The same impulse that will push investors out of stocks and bonds will likely push them into gold. Gold prices have risen steadily in the face of recent market volatility. While many will look to the potential conflict with Russia as that catalyst, we are convinced the smart money is rotating away from overvalued equities in droves. They can do the math on a devaluing dollar.

But what will become very obvious in the coming years will be the significantly higher costs to service our national debt. If it was an average of less than 1% on the Fed Funds rate that drove our costs 30% higher over the last five years, how much higher will they be five years from now when we factor rates that will be double these levels?

As paper assets struggle into a tightening Federal Reserve regime, we expect to see gold get a big rotational bid. Higher rates will likely mean significant dollar weakness as deficits explode higher.

See our video on why our Debt Affordability will likely drive significantly higher gold prices here.

This is the math that has us convinced that gold is indeed a better way. We are entering into a debt spiral that the country will not survive intact.

The dollar will likely lose dramatic value in the coming years as our ability to roll our debts over at lower costs is now over. Consider as well, that much of the debt that has been accumulated has been shorter duration, which means that higher interest rates will be felt sooner as more and more debt must be rolled in the short term.

We believe this makes gold a one-way bet. And why if you are also moved to a similar conclusion, you should ask yourself two questions. We’ve provided our answers in bold.

#1. Will our National Debt be higher in the future?

This is a 100% certainty unless we outright default. We can only imagine how high the price of gold would be if the United States were to outright default on the debt.

#2. Will our costs to service debt be higher in the future?

The only math that would allow for a lower cost to service would be negative rates. Negative rates are a primary driver for dramatically higher gold prices.

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Best, Adam Baratta Editor-in-Chief Brentwood Research