Why hedge fund bear Russell Clark is urging caution on gold prices

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Bear market

Global equities hedge fund Russell Clark Investment Management is taking a bearish stance on “expensive” gold, and urges caution on the price of the safe-haven commodity.

In a recent market commentary, Russell Clark examined the long-term value of the precious metal, and its relationship with the price of food.

Traditionally, investors have flocked to the commodity as a defensive asset during times of turmoil, with gold holding its value over the long term, and being recognised as both a store of money and medium for transactions.

But despite soaring in the early days of the Covid market crash last spring, the gold rally quickly petered out as stock markets rebounded later in the year.

Gold, as measured against food prices, was cheap in 1970 and 2000, but expensive in 1980, 2012, and in 2020, Clark observed.

In 2021, despite a generally inflationary view, gold has disappointed, the eponymous portfolio manager of the London-based firm said.

“Gold looks expensive versus food and fund positioning looks very long,” said Clark.  “Investors should be cautious on the outlook for gold.”

He noted: “Gold looks to be driven far more by fund flows, as its prices had matched inflows into the main gold ETF, GLD US, very closely.”

While gold’s value in the past has been measured by the amount of dollars in circulation, Clark -who is known for his long-standing bearish perspective on stock markets – indicated the relationship between money supply and inflation has “broken down.”

Clark drew on consumer prices, specifically The Economist’s Big Mac Index – which tracks the cost of McDonald’s’ flagship product as a measure of purchasing power – to underline his point.

“One ounce of gold bought 400 Big Macs in 2010, up from a low of 100 in 2000. We have other data points, where in 1979, one ounce of gold bought 660 Big Macs, up from a low in 1970, when it only bought 66 Big Macs. The current ratio of 350, makes gold look expensive.”