Sensex versus Gold Price
(This is for information and educational purposes only. This should not be
construed as a recommendation or investment advice even though the author is a CFA
Charterholder. Please consult your financial adviser before taking any
investment decision. Safe to assume the author has a vested interest in stocks
/ investments discussed if any.)
Sensex and
gold are two different animals. They have different risk and return
characteristics. One is an
equity asset and the other is a commodity.
While one can expect cash flows,
mainly in the form of dividends, by holding the thirty stocks that form part of
the Sensex; one cannot expect any cash flows from gold.
While Sensex is primarily driven by the profitability and other fundamentals of the 30 bluechip companies that form part of Sensex, global gold prices are impacted by a variety of factors.
Sensex is also an expression of the investors' sentiment and the attractiveness of the Indian stock market.
1. Comparing the non-comparables
Strictly
speaking, Sensex and gold cannot be compared. However, the numbers representing
the Sensex and India gold price look similar and people often tend to compare Sensex with gold price.
As of today, Sensex closed at 74,500 while India gold price closed at Rs 72,410 per 10 grams.
Investors suffer from availability bias -- a mental shortcut whereby they tend to recall examples that are readily available or that come to mind easily.
Just because the values of Sensex and domestic price of gold are readily available and are quoted in the media prominently, investors tend to compare Sensex with gold.
Like we have a gold-silver ratio, there is a Sensex-gold price ratio also.
(Sensex is
formally known as S&P BSE Sensex, though nobody practically uses it.)
2. Factors affecting gold
While
gold prices internationally are expressed in US dollars per troy ounce, domestic price of gold in India is expressed in terms of Indian rupees per 10 grams.
World gold prices are mainly impacted by:
- supply of gold and the demand for it
- global interest rates
- currency exchange rates
- geopolitical tensions / developments
- global inflows into and outflows from gold ETFs
- demand from Central banks
Several Indians still tend to express gold in terms of tolas ( 1 tola equals 11.66 grams) or kaasulu (1 kaasu equals 8 grams).
India gold price is a function of international gold price which is expressed in US dollars and the dollar-rupee exchange rate.
As
rupee traditionally depreciates against the US dollar over the past
several decades, India gold price returns over the years tend to be much higher than
the international gold price returns.
India gold price is also impacted by changes made by the Government of India in customs duty on gold imports.
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Related blogs on Sensex and Gold:
Understanding Real Sensex and Currency Debasement
Why the Divergence Between Sensex and Nifty 50 in Today's Trade
What is Sensex and Its Importance in Indian Stock Market?
RBI Gold Holdings
Who is Eating My Gold ETF Return?
Seven Reasons Why Gold Monetisation Scheme Will be a Spectacular Failure
Gold Ration Shops
RBI Bought 200 Tonnes of Gold - Should You Buy It Now?
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3. Sensex vs Gold Price: Yearly Returns from 2000 to 2024:
Table showing Sensex and India Gold Price >
Calendar year-end data from 2000 till 2024 and their yearly returns >
But whenever Sensex outperforms, its outpeformance is larger versus gold; hence overall in 24 years, Sensex outperformed gold.
Between end of December 2000 and now, Sensex's absolute returns are 1,775 per cent (13.3 per cent CAGR or annualised returns) while gold returns are 1,545 per cent (12.7 per cent CAGR).
At the end of 2000, Sensex was around 4,000 while gold was at Rs 4,400 per 10 grams. By 2010, both reached levels of over 20,000.
But by the end of 2011, it was different story. While Sensex was quoting at 15,500, gold was at 27,300; but by the end of 2014, both were almost at the same level.
Years 2008 and 2011 are outliers for gold for its outperformance is much larger due to rupee depreciation, international gold price rise and Sensex heavy fall during the years.
Year 2008 was one of the worst years for Sensex when it was impacted by the Global Financial Crisis following the Lehman Brothers collapse. In 2011, Sensex was impacted by the negativity surrounding the UPA government's lacklustre economic performance.
In 2008, Sensex fell by 52.4 per cent, while gold price rose by 28.6 per cent with the Sensex underperforming gold by 81 per cent for the year.
4.Uncorrelated assets
In portfolio theory, investors need to hold uncorrelated assets for a better overall return per unit of risk.
If you take the full data of 24 years analysed above, Sensex and rupee gold price appear to be correlated with Sensex giving a CAGR of 13.3 per cent, with gold slightly underperforming with 12.7 per cent.
However, in select five- or six-year periods, they appear to be uncorrelated. For example, gold price provided a return of only 1.7 per cent between end-2012 and end-2018 while Sensex returned 85.7 per cent in the same period.
Between 2002 and 2007, gold returned only 112 per cent, while Sensex returned 500 per cent.
In a particular calendar year, if gold gives negative returns, Sensex tends to provide positive returns and vice versa. Years 2001 and 2015, however, are exceptions because both Sensex and gold gave negative returns in those years.
Unless we do a correlation analysis of Sensex and domestic gold price over long periods of 30 or 35 years (which is outside the scope of this blog), one cannot fully comment about the correlation between Sensex and gold.
5. Summary
Different asset classes perform well in different periods of time. Asset prices are not predictable. If someone claims to forecast asset prices correctly, you better double check his or her claims.
A majority of Indians are gold bugs and their fondness for gold ornaments is legendary.
As per research by Aditya Birla Sun Life Mutual Fund, Indian households' share of gold in total household assets was more than 15 per cent and equities less than 5 per cent as at the end of March 2023.
Young and novice investors, motivated by wealth creation, may be better off holding equities and equity mutual funds for superior long term returns depending on their unique personal situation, return objectives and risk appetite.
Most of them may be already holding enough gold -- so what is the point in acquiring gold additionally?
From an asset allocation point of view, wealthy investors with wealth preservation motive tend to hold gold in small quantities, say, 5 to 8 per cent of their investable assets. Excess may lead to indigestion.
Crypto assets, like Bitcoin and Ethereum, have taken some sheen off gold internationally in the past four to five years.
While crypto assets are off-limits for Indian investors due to regulatory vacuum and strange tax obligations, equities may be a superior class for risk-taking and young investors in the long term of five to 10 years.
One caveat is that as Sensex is at elevated levels, one may expect lower returns from Indian stocks in the next one or two years.
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References and additional data:
Top image: AI-generated image from Google Gemini
IBJA Rates on gold PDF
Gold price data Forbes India
Sensex historical data - BSE India (choose yearly data option)
Sensex monthly data - Investing.com
BSE Sensex historical data including yearly returns from 1990 to 2024
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Disclosure: I've got a vested interest in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
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