Fund manager raises fiscal doom loop, says $10,000 gold price is just the starting point

Huithong.com Aug 28 News—— According to a fund manager, gold is ready to resume its long-term upward trend after a pullback. He believes that excessive government debt globally has made it impossible to fight inflation as before, and ultimately, Chair Warsh will be forced to confront the mathematics: higher interest rates will lead to a fiscal doom loop, making currency devaluation a more likely outcome. He states that gold's approximately 65% rise last year is only an early signal in the cycle, and that investors remain significantly underallocated. He is convinced that gold will reach $5,000 to $7,000, is confident it will hit $10,000, and believes the current mathematical constraints outweigh any hawkish rhetoric from the Federal Reserve.

Setting aside recent volatility, gold has achieved extraordinary returns over the past two years. And according to the perspective of a fund manager, the precious metal is now prepared to resume its long-term upward trend after the recent pullback. He notes that although the months-long correction suggests a maturing market, gold prices are still far from their peak.

Mathematics Is Not on the Fed’s Side

Larry Lepard, managing partner at Equity Management Associates, explained that the global monetary system is only just beginning to confront an uncomfortable mathematical reality: accumulated government debt has become excessive and can no longer fight inflation as before. Although Federal Reserve Chairman Kevin Warsh is known for his hawkish stance on inflation, Lepard says that monetary and fiscal constraints will ultimately dictate policy. Warsh, who is preparing to take over the Fed, has talked about shrinking the Fed’s balance sheet, implying a tighter monetary environment. Lepard states that this new Fed chair will ultimately have to face the math. He says: "The math just doesn’t work for him."

Lepard adds that the disconnect between mainstream monetary policy narratives and underlying fiscal realities is widening. He comments: "On one side is the narrative, and on the other is the mathematical fact," pointing to ever-growing government deficits. He emphasizes that this distinction is crucial for gold investors, and even after the dramatic rise in precious metals, he still believes the fundamental forces driving the market remain unchanged.

Volcker’s Remedy Is No Longer Replicable

The problem, Lepard argues, is that policymakers no longer have the same flexibility that they had in dealing with the inflation crisis from the 1970s to the early 1980s. Former Fed Chair Paul Volcker managed to break the inflation cycle then by raising interest rates to deeply positive real levels. However, Lepard points out that at the time, U.S. government debt was about 30% of GDP, whereas today it is about 120%.

Lepard says: "I don’t see how we can get out of this unless we go through many years of very high inflation like in South America, maybe that’s the outcome, or there is a complete failure, leading to a currency reset."

Fiscal Doom Loop: This Is How Currencies Fail

Lepard describes this dynamic as a potential fiscal doom loop: . He says: "This is how currencies fail."

Against this backdrop, Lepard believes currency devaluation is the more politically likely route. Faced with a dilemma—either allowing excessive debt and leverage to be cleared through default and economic contraction, or creating more money to support the financial system—he expects policymakers will choose the latter. He states: "Given the choice between printing money and collapse, they will print money."

AI Can’t Save Us, Growth Can’t Escape Inflation

Even stronger economic growth may not provide an escape. Lepard acknowledges that AI could lead to considerable productivity gains, but doubts these gains will happen quickly enough or be large enough to overcome the current fiscal imbalances. Eliminating the debt burden would require nominal economic growth to accelerate dramatically, which he believes will almost certainly be accompanied by inflation.

If bond investors become aware that governments intend to escape their debt burdens through inflation, Lepard says this very perception could push yields higher and force policymakers to intervene.

For gold, this means that regardless of short-term fluctuations, the long-term investment logic remains intact. Lepard states: "So we really don’t know how it will play out politically. But mathematically, we are on the right side of this trade."

Up 65% Last Year, Still Just the Beginning of the Cycle

Lepard remains confident even after the sharp rise in precious metals. He notes that gold rose approximately 65% last year, an unusual performance for the metal and reminiscent of the boom phase at the end of the 1970s bull market. He does not see this as the end of the cycle, but rather as an early signal that investors are becoming increasingly concerned about currency devaluation. The shift in investor psychology has already begun: many hesitate to buy because gold has already risen so much. But Lepard believes gold remains significantly underrepresented in mainstream portfolios and that the current currency cycle is still relatively young. He says: "Though it’s gone up a lot, we’re still early in the cycle."

Lepard suggests that the latest rally may mark the beginning of another major upward phase as the market becomes increasingly aware of the constraints faced by the Fed and the U.S. government. He says: "Based on current market performance and the Fed’s actions, we are just beginning the next leg higher." Meanwhile, he also notes a key shift in how people view inflation, which is another important component of the precious metals narrative. Before the pandemic, inflation was largely an abstract issue for most Americans; now, consumers are experiencing it firsthand in their daily shopping and increasingly regard it as a real problem. This recognition hasn't yet translated into widespread ownership of gold or other monetary hedges, but Lepard expects that could change dramatically if inflation persists.

He estimates that currently only 5% to 10% of people fully appreciate this risk and are willing to seek protection through assets like gold. If that share eventually rises to 50% to 60%, he says, the impact on traditional financial assets and fiat currencies will become dramatically more pronounced.

Price Target: $5,000 to $7,000 Is a Lock, $10,000 Very Confident

Thus Lepard remains calm about the prospect of significantly higher gold prices. He says: "I tell my investors, I am highly confident gold will reach $5,000 to $7,000, and I am quite confident it will reach $10,000." More extreme forecasts depend on much worse monetary outcomes. Lepard says, He does not use these scenarios as his base investment assumption, but adds that they remain tail risks.

Compared with the 1970s gold bull market, he says today’s market still offers lessons. Lepard points out that during that inflation cycle, gold rose about tenfold from its early lows, and a similar move today would bring the price to around $10,000 per ounce. The bigger difference, Lepard says, is that today’s policymakers have far less room to apply the remedies used to end the previous inflation crisis. With much higher debt levels, aggressive deeply positive real rates would be intolerable for government finances. For Lepard, this mathematical constraint outweighs any hawkish rhetoric from the Federal Reserve.

Conclusion

Lepard’s core logic ultimately boils down to a math problem: with debt at about 120% of GDP today, the Volcker-like high-rate remedy is no longer viable—higher interest rates mean higher interest burdens, larger deficits, more borrowing, until the doom loop ensues. Thus, policymakers are left with only one politically viable option—money printing—and each new round of printing adds more fuel to gold’s rise. In Lepard’s view, last year's 65% gain is not a top-out signal, but merely an early movement in this currency cycle: the underallocation of gold by mainstream investors suggests the rally is far from fully priced in. As for Warsh’s hawkish stance, it too will ultimately be overwhelmed by mathematical reality.

For gold bulls, the only question is: when the money-printing train really comes, will you get on board, or keep standing on the sidelines?


Spot gold annual chart Source: Yihuitong

East 8th District Aug 28, 12:13 Spot gold quoted at $4,579.29 per ounce