‘The math is on gold's side': Larry Lepard sees rising debt forcing currency debasement

Looking beyond the recent volatility, gold has seen extraordinary gains in the last two years, and according to one fund manager, after the recent correction, the precious metal is ready to resume its long-term uptrend. In an interview with Kitco News, Larry Lepard, Managing Partner at Equity Management Associates, said that although gold’s months-long correction is an indication of a maturing market, prices are nowhere near a top. Using a baseball analogy, he said that gold’s bull run is in its sixth or seventh inning. He explained that the global monetary system is only beginning to confront an uncomfortable mathematical reality: governments have accumulated too much debt to fight inflation the way they have in the past. Although Federal Reserve Chair Kevin Warsh entered the year with a reputation as an inflation hawk, Lepard said monetary and fiscal constraints will ultimately dictate policy. As he was preparing to take over as head of the U.S. central bank, Warsh had talked about shrinking the Federal Reserve’s balance sheet, which would imply tighter monetary conditions. However, Lepard said the new Fed chair will eventually be “forced to confront the math.” “The math is not going to work for him,” he said. Lepard added that there is a growing disconnect between the prevailing monetary policy narrative and the underlying fiscal reality. “There’s the narrative and then the mathematical facts,” he said, pointing to increasingly large government deficits. Lepard said this distinction is critical for gold investors. Even after the precious metal’s dramatic rally, he sees the fundamental forces driving the market as largely unchanged. The problem, he said, is that policymakers no longer have the flexibility they had during the inflation crisis of the 1970s and early 1980s. Former Federal Reserve Chair Paul Volcker ultimately broke that inflation cycle by pushing interest rates high enough to generate deeply positive real yields. However, Lepard noted that U.S. government debt was roughly 30% of GDP at the time, compared with around 120% today. “I don’t see how we get out of this without either very high inflation for a bunch of years, kind of like South America, and maybe that’s the outcome, or just an outright failure leading to a monetary reset,” he said. Higher interest rates are particularly problematic in the current environment because they increase the government's debt-servicing costs, which in turn increase deficits and require even more borrowing. Lepard described that dynamic as a potential fiscal “doom loop”: higher rates increase interest expenses, larger interest expenses widen deficits, governments issue more debt and the additional supply creates still more upward pressure on borrowing costs. “That’s really how currencies fail,” he said. Against that backdrop, Lepard sees currency debasement as the politically more likely response. Faced with the choice between allowing excessive debt and leverage to unwind through defaults and economic contraction or creating more money to support the financial system, he expects policymakers to choose the latter. “Given the choice of print or crash, they will print,” he said. Even stronger economic growth may not provide an easy escape. Lepard acknowledged that artificial intelligence could generate meaningful productivity gains, but he doubts those gains will arrive quickly enough or be large enough to overcome existing fiscal imbalances. Growing out of the debt burden would also require significantly higher nominal economic growth, which he argues would almost inevitably be accompanied by inflation. If bond investors recognize that governments intend to inflate their way out of their debt burdens, Lepard said that realization itself could push yields higher and force policymakers to intervene. For gold, that leaves the long-term investment thesis intact regardless of shorter-term volatility. “So we just don't know how it plays out exactly politicall...