Gold has been on a strong run. Indian stocks, meanwhile, have struggled. Together, this has pushed the ratio of gold to the Sensex to its highest level in over a decade—if one leaves out the brief equity dip during the 2020 pandemic.
According to reports, on Friday, the gold-to-Sensex ratio rose to 1.4. This is, according to a business newspaper, the highest since early 2014, when it touched 1.5. For comparison, the ratio was 0.97 at the end of December last year and 0.89 in September 2021.
Over the past 30 years, the median ratio has been 1.04. This suggests that gold and equities usually move together in the long run.
There are clear examples. Between late 1998 and mid-2000, the Sensex outperformed gold. Then equities fell, and gold took the lead between 2000 and 2003. Stocks did better from 2003 to 2007, followed by a jump in gold prices during 2008 and 2009 as equities dropped.
More recently, equities rose steadily from 2012 to 2021, except for a brief fall in early 2020. During this time, gold remained flat. But since September 2021, gold has outperformed.
This streak has now lasted four years—the longest run for gold in three decades. It beats even the strong period from 2000 to 2003.
In these four years, domestic gold prices (24K standard) have climbed 147 per cent. Prices rose from Rs 45,600 per 10 grams in September 2021 to Rs 1,12,895 this Wednesday.
The Sensex, in the same period, is up only 37 per cent. It closed at 81,159 on Thursday, compared to 59,126 four years ago. The gold-to-Sensex ratio has jumped nearly 80 per cent, rising from 0.77 to 1.37.
In the past, a rising ratio signalled that stocks were undervalued. This often created buying opportunities.
But analysts do not expect a reversal soon. They believe gold will continue to do better.
One reason is that equity valuations remain high. In earlier periods, the ratio rose when stocks became cheap. For example, in February 2009, the ratio hit 1.73. At that time, the Sensex price-to-earnings ratio and price-to-book ratio dropped to 10 and 2.5, a two-decade low.
Similar declines in valuation happened in 2012 and 2020. But this time, equity valuations have stayed high. The Sensex price-to-book ratio is near its 10-year peak. The trailing price-to-earnings ratio is also close to post-Covid highs.
Another reason is gold’s new role in global finance. Analysts say central banks are lifting the floor under gold prices. They are doing this by holding more gold and reducing the amount available for trading.
Analysts have advised investors to protect their bond and equity portfolios from unexpected risks by holding gold and other commodities.
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