Gold to Sensex ratio highest since 2014, barring Covid year

A continued rally in gold prices and a poor showing by stocks have pushed the ratio of the gold price to the Sensex to its highest level in over a decade if one omits the pandemic days of 2020, when there was a fall in equity prices for a brief period.

- KRISHNA KANT

The ratio of gold to equity for the Indian markets on Friday climbed to 1.4, the highest since January-March 2014, when it was close to 1.5. For comparison, the ratio was 0.97 at the end of December last year and 0.89 at the end of September.

The current ratio is also out of line with the historical averages over the longer term. In the past 30 years, the median value of the ratios of the spot gold price to the Sensex has been 1.04.

This means historically, equity and gold prices move in tandem over the long term and a period of good performance by one asset class is followed by its underperformance.

For example, the Sensex outperformed gold for nearly two years between late 1998 and June 2000. This was followed by a steady selloff in equities for the next few years and the yellow metal beat the Sensex between the middle of 2000 and the middle of 2003.

Equity then outperformed gold for four years between 2003 and 2007, followed by a sharp rise in gold prices in 2008 and 2009 while stock prices declined.

Recently, there was a steady rally in equities for nearly a decade between 2012 and 2021, barring a blip during March-June 2020, while gold prices languished.