Lear Capital Shares What You Need To Know About Government Debt and the Price of Gold

In the past, as the national debt level grew in the U.S., gold’s value also often increased.

With the level of governmental debt forecast to rise in the future, investors’ interest in gold could continue to escalate, according to a new report from Lear Capital, the Los Angeles-based precious metals firm founded by Kevin DeMeritt in 1997.

Lear’s recently released report, $3,200 Gold: How the Debt Trap Could Get Us There, touches on the relationship between gold prices, currency production, and U.S. debt, which currently totals more than $33 trillion.

In the years since the government officially closed the door on the gold standard in 1971 — following an unsuccessful attempt to extend the Bretton Woods fixed exchange rates system — its approach to printing money has helped drive U.S. debt higher, according to Kevin DeMeritt.

“We were at $8 trillion in 2008,” Kevin DeMeritt says. “It took the entire time we’ve been a country to get to $8 trillion, and then from 2008 to today, we’ve tripled the amount of debt we have.”

Yet as the debt level rose in past decades, gold prices, too, have increased — at times, significantly. Starting in 1972 — the year after the U.S., as the report says, severed the last remnants of the gold standard — gold, which had been priced at $40.62 per troy ounce in 1971, increased to an average price of more than $58 an ounce, and then in 1973 nearly doubled, reaching $97.39, according to National Mining Association statistics.

The metal’s average annual price has remained above $100 an ounce since 1974, when it rose to $154 an ounce, and its value has continued to climb upward. After breaking the $1,000-per-ounce barrier in 2010, gold has continued to show a strong annual performance, reaching more than $1,800 an ounce in 2022.

Gold’s trajectory, Kevin DeMeritt says, has differed significantly from paper money’s path.

“[With] every dollar you print, the money that’s already out there becomes worth less; that’s what happens over time to paper currency,” he says. “If you add an increase in demand onto that physical supply [of gold] that’s fairly limited, usually what you’re going to find is prices go up; it’s economics 101. Paper money is probably going to continue to fall, [as] it has for hundreds of years now — and the price of gold is probably going to continue to increase.”

The Debt Level’s Impact on Gold

The U.S. government has periodically printed money as a means to infuse the economy; in May 2020, for example, USA Today estimated the Federal Reserve was on track to purchase $3.5 trillion in government securities using newly produced currency by the end of that year.

Fueling the economy with newly minted funds, Kevin DeMeritt says, can cause issues such as inflation.

“The other effect you’re going to get is going to be bubbles, because you have so much money that it’s going to go into different asset classes,” he says. “It happened in 2000 with internet stocks; it happened in 2008 with real estate. The bubbles happen, then the Fed raises interest rates, and you get a crash. The height of the cycle — and the crash — is going to be much bigger when you print up [a tremendous amount] of money.”

When market and other uncertainty has pushed debt upward, a number of investors have turned to gold, which is sometimes viewed as a safe harbor asset because it has historically retained value despite unsteady economic conditions. 

During the dot-com boom, for instance, technological advancements helped usher in the longest expansion period on record in the late 1990s, according to the National Bureau of Economic Research. After the investment frenzy died down, numerous tech companies filed for bankruptcy and the economy contracted in the third quarter of 2001. As the economy recovered, the national debt, which had been $6.5 trillion, grew to $9 trillion by 2007.

Gold, which had reached a $256-an-ounce low after the dot-com crash, outpaced the national debt’s growth, with gold prices rising 1.6 times faster. By 2007, the price of gold reached $665 an ounce.

Gold has, in fact, doubled in value during the most recent two economic crises, according to Lear Capital’s $3,200 Gold: How the Debt Trap Could Get Us There report.

In the wake of the 2008 housing crisis, by October 2010, following the subsequent money production and spending that occurred in response, gold had climbed to $1,346.

What’s Next for Gold?

Today, gold is trading at more than $2,000 per troy ounce. If the precious metal’s past performance is any indication, prices for the asset may head even higher in the future, given that the national debt may continue to increase.

A projection from the U.S. debt clock that’s cited in Lear Capital’s report suggests the amount of national debt could grow by 36%, surpassing $45 trillion by 2027.

If gold maintains the same growth rate as in the past, expanding 1.6 times faster than debt, its value could hypothetically reach a whopping $3,200 an ounce by 2027 — 60% higher than gold’s current value.

Continued strong international and other investment interest, according to Kevin DeMeritt, may contribute to gold prices increasing.

“The central banks have been piling into gold over the past four or five years because we’ve printed up so much money, and now there’s a distrust — [they wonder], ‘Will we be able to service the debt in the United States?’” the Lear Capital founder says. “So you need to look for that asset that’s going to give you stability and offset the volatility from some of the other areas; gold has an inverse relationship to stocks and other types of assets.”