ROGER SILK is the chief executive officer of Sterling Foundation Management, LLC, a leading provider of charitable planning solutions to financial, legal and tax advisors in the United States. His innovative approach has earned him a stellar reputation among investment, accounting, financial planning, and legal professionals, who seek his counsel in equipping their firms and clients with a diverse range of solutions, entities, and planning tools that bring forth both financial and philanthropic benefits.
Prior to co-establishing Sterling Foundation Management, Roger Silk demonstrated his financial prowess as a treasury officer at the World Bank, managing a portfolio worth billions of dollars in repurchase agreements. In an exclusive interview with Business a.m., the widely acclaimed financial expert, analyst, and author, alongside Katherine Silk, shared their knowledge and insights on the current investment prospects of gold, identifying key factors for investors to consider and potential risks to mitigate as they exploit the precious metal market in the future. Excerpts:
Roger Silk, CEO, Sterling Foundation Management, US
Katherine Silk
With the prices of gold and silver currently below their historic highs, how should investors assess their potential as inflation hedges compared to other assets?
Both silver and gold are inflation hedges over the long run much more than over the short run. Inflation is the fall in the purchasing power of fiat money. Gold — and to a lesser extent, silver — have historically served as money. Because gold and silver cannot be created out of thin air, like fiat money can be, gold and silver tend to hold their value over long periods. A perfect inflation hedge would immediately increase in market value exactly as much as the fiat currency it is hedging decreases. There is no perfect inflation hedge. TIPS, as we predicted in 2021 in our book Politicians Spend, We Pay, turned out to be a disastrous inflation hedge.
Can you elaborate on the factors that contribute to the perception of gold as ‘real money’, and how does this perception influence the role of gold in an investor’s portfolio, particularly during periods of high inflation?
Gold has been money for most of the past 3000 years. Today, gold is held and demanded by most of the world’s biggest central banks, which signals that despite the rhetoric, central bankers treat gold as real money. In today’s world, gold is the only money-like commodity that cannot be printed by a government.
With gold prices being more reactive to geopolitical events than inflation in the short term, how would you advise investors to approach gold as an inflation hedge in the immediate future?
Investors should be aware that, measured in dollars, the price of gold has been quite volatile since the decoupling of gold from the dollar in 1971. The standard deviation of annual return (a common measure of volatility) has been about 26 percent since 1971, compared to the S&P 500’s 17 percent. Gold is a hedge over the long term, but not particularly over the short term.
Do you see these geopolitical developments prolonging gold’s sensitivity to political events, or will gold’s traditional sensitivity to inflation eventually prevail?
Over the very long run gold has held its purchasing power. The late Prof. Roy Jastram conducted an exhaustive study of gold from 1560 to 1976, and published his results in a book titled The Golden Constant. Over those four centuries, there was tremendous geopolitical strife, including not only the two eponymous world wars, but the Napoleonic Wars which were a world war in all but name, and the Seven Years War, which Winston Churchill called “the first world war.” Despite these wars, despite the development of the New World, despite the Industrial Revolution, through it all gold basically held its purchasing power.
Considering the current prices of gold and silver are below their historic highs when adjusted for inflation, what factors do you believe could drive the prices back up to or above their previous peaks?
In addition to fundamental factors, such as money supply, that can be quantified, extremes of prices are nearly always driven by investors’ or consumers’ emotions and expectations. Often when prices rise sharply, part of that rise is driven by fear of further rises, and expectations of further rises. And the same applies to sharp price falls. It is often impossible to predict the specific events which can trigger those emotionally driven moves.
The price of gold is influenced by various factors, including fear. Of the three fear factors – political instability, unexpected inflation, and war – which do you think has the strongest impact on gold prices in the short term?
In the short term, the answer is probably whichever of these factors is least anticipated. Markets react to surprises, especially negative surprises, much more than to developments are expected, even if those expected developments are negative.
Outside of using gold to hedge against inflation and uncertainty by different classes in the investment world, how is the market shaped and how will it be shaped in the future by ordinary users of products made out of gold?
Aside from its monetary demand, the largest source of demand, by far, for gold is jewellery. Demand for gold jewellery responds to the price of gold, pretty much the way the demand for any other commodity responds to price.
Where are the levers of power in the gold commodities play right now and where will these levers be in the next 5 to 10 years?
If I understand the question, you’re asking what actors move the price of gold the most? Of all market participants, hedge funds probably have the most degrees of freedom to buy, or sell, and thereby affect the gold market. Hedge funds at the end of 2023 had as a class an estimated $5 trillion, of which only a small fraction was in gold. The supply of gold is very inelastic, so most of the change in the gold price is driven by changes in demand.
How much will gold play in a future where AI and its associated externalities hold sway?
Gold has retained its central monetary role since the time of the Pharaohs. I don’t see why AI would change that.
