Sensex versus Gold Price - vrk100 - 29May2024

Sensex versus Gold Price

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(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.) 

 

 

 

(Update 25Mar2025 with data from 2000 to 2025 is available below)

 

 

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 >

 

As shown in the above table, Sensex outperformed gold in 13 years while gold outperformed Sensex in 11 years (data from 2000 to 2024 -- data for 2024 are up to 29May2024 only).

 

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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The following updates are added after the above blog was published on 29May2024:

 

Update 25Mar2025: Data from 2000 to 2025 is updated with data upto 24Mar2025 >

 

As of 31Dec2024, Sensex level and rupee gold price are almost same level of around 78200. This looks quite uncanny, but it is true.

 

During the Global Financial Crisis (GFC) of 2008 and self-induced crisis of the UPA government in 2011, gold had offered good protection to Indian investors with generating decent returns in 2008 and 2011 while Sensex had disappointed.  

 

In COVID-19 pandemic outbreak year of 2020, gold outperformed Indian stocks by a large margin.

Even in the face of severe drawdown of 2025 in Indian stocks, gold has provided decent returns to Indian investors.

 

 

 

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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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The Little Secret Behind Nifty Next 50 Index's Recent Success

 

Rapid Rise of India's PMS Industry 

 

NSE Indices Calendar Year Returns: 2006 to 2024

 

How to Buy Nifty Midcap Index 03May2024 

 

NSE Emerging Indices Comparison 31Mar2024 

 

India Passive Funds and Their Asset Size 29Apr2024

 

Guide to Tracking Error of Mutual Funds 27Apr2024

 

Mutual Fund Asset Class Returns 31Mar2024

 

JP Morgan Guide to Markets 31Mar2024

 

Gilt funds worth considering

 

Global Market Data 31Mar2024

 

Understanding Real Sensex and Currency Debasement

 

Select Gilt Funds Performance 

 

SEBI Categorization and Rationalization of Mutual Funds

 

AMFI List of Market Cap: Categorization of Large-, Mid- and Small-Cap Stocks

 

Stocks and Peer Comparison by Industry 

Weblinks and Investing

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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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Gold Price Declines-VRK100-05Oct2011

Gold Price Declines

Due to concerns about paper currencies across the world, investors are flocking to assets, like, gold, silver and other commodities. The US dollar’s weakness has helped the commodities’ prices to rise faster. However, in the last few months, the US dollar is gaining strength against other major currencies, like, euro, pound sterling and others.

With dollar strengthening, global investors have started moving money to dollar assets and started selling other currencies, gold other commodities. After touching a peak of $ 1,930 per ounce, the world gold price has come down by 15 per cent to the current $ 1,640 per ounce. Accordingly, gold prices in India too should have come down from a peak of Rs 28,000 to Rs 24,000 per 10 gm. But the rupee value against dollar has weakened by 10 per cent in the past two months limiting the gold price decline to around Rs 26,000 per 10 gm in India.

Gold price in India is driven mainly by two factors – one is international gold price expressed in US dollars and the dollar-rupee exchange rate.

Gold price had gone up very fast in the last one year. As such, some investors may be booking profits on their investments by selling gold.

Fact Is Stranger Than Fiction!-VRK100-21Aug2011

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The Terminal (2004)in an interesting movie directed by Steven Spielberg featuring Tom Hanks and Cahtherine Zeta-Jones in the lead roles. Tom Hanks finds himself stranded at the JFK International Airport, New York. He is not allowed into New York city by the airport security manager. The security manager tries every trick up his sleeve to send Tom Hanks back to his country. For every trick, Tom Hanks would respond by saying ‘I Wait,’ and refuses to go back home without visiting New York city. Investors seem to be in a similar mood and following his mantra:

“I Wait”

Of course, Tom Hanks’ long- wait would be fruitful at the end. I doubt whether equity investors would be benefited from their “waiting & watching” mode to buy good quality stocks. Investors who take more risk during the highly uncertain times are rewarded the best in markets. And we are going thro uncertain times now.

Global Investors are afraid of recession in the US and Europe. The same sentiment is echoed in India too with benchmark Sensex losing about four per cent for the week ended August 19. However, the benchmark indices do not truly represent the kind of pessimism and negativism that exists in the minds of Indian equity investors. Till a few weeks back, experts treated rising inflation as problem number one for India. However, fast changing developments have taken place and now people seem to be less worried about inflation. Our mindspace is now fully occupied by political controversies surrounding the ways of tackling India’s corruption. This means to say that corruption has now become India’s number one issue confronting the nation.

Business media loves stock market crashes. Newspaper editors seem to be fast running out of adjectives/epithets to use for headlines. In the last two weeks, they have already used up their repertoire of words – bloodbath, mayhem, massacre, butchery, carnage, slaughter, sea of red, stocks bludgeoned, distress sale, etc. What words will they use if markets fall further next week? It’s strange that the more educated we are the more we use primitive and tribal words signifying that ‘homo sapiens’ has not yet come out of the cave world!

Global cues

Some European nations and the US seem to be hurtling toward recession. There are concerns that the US is going the way of Japan – long-term decline. While the stock markets are going down the world over, the government bond prices are moving in the opposite direction. The price of the benchmark 10-year US Treasury security had gone up with its yield going down below 2 per cent for a brief period last week. This is the lowest yield for the benchmark 10-year US Treasury since the World War II. (Bond prices and yields move in opposite direction.). Standard & Poor’s has tried to calm the markets by telling that it is confident of France maintaining its AAA rating. Stocks are falling while gold and silver are going through the roof.

Gold price is the ultimate Fear Index

Gold price (in dollar terms) has gone up by around six per cent, while Sensex and Dow Jones have gone down by more than four per cent for the week ended August 19. World gold price is quoting at $1,850 per ounce while in India it is quoting at about Rs 28,000 per 10 gram. Gold seems to be the ultimate Fear Index. Investors are scared that paper currencies are in danger of becoming toilet paper! The high government debt in the US and eurozone is threatening the growth prospects of economic growth in the developed world. However, Indian investors may start selling their gold partially and switch their money to good quality Indian stocks gradually as part of risk management. Let us assume gold touches $2,500 per ounce and then it starts to fall. When everybody starts selling gold there will not be anyone left to buy your gold except Chinese central bank. Remember Tulip mania of 1600s?

Corruption and hypocrisy

We Indians are hypocritical about tackling corruption. Indira Gandhi famously (one can say notoriously) said, “Corruption is a global phenomenon.” It would be no exaggeration to say that corruption has touched every nook and corner of India. Corruption is entrenched in our minds. Everybody is affected by it. Some are positively, but the poor highly adversely. Strangely, the most corrupt in India keep their ill-gotten in gold and real estate! There are several businessmen and middle classes who love corruption. But, outwardly they maintain a façade of honesty. I think it’s time we admitted that we are corrupt. If we realize that we are corrupt, we can take up the cudgels against corruption sincerely and effectively. Realisation is the first thing in solving the problem. One fervently hopes that our lawmakers would find a way out of the deadlock through dialogue, debate, sagacity and statesmanship.

Indian markets

Indian equity investors seem to be concerned about the consequences of the prolonged agitation against the scourge of corruption. The controversy surrounding the arrest of Anna Hazare is not good for the country economically and politically. The earlier the crisis is resolved the better for us. Let us hope that serious and sincere action is taken by the Government to punish the guilty swiftly.

Reserve Bank of India has been repeatedly saying that it will not stop its fight against inflation despite global problems. RBI’s statements have not helped the markets.

It is wrong to look at narrow benchmark indices like, Sensex or Nifty. We need to look at broader indices, like, CNX 500 or BSE 200. Many mid-cap and small-cap stocks have fallen by more than 50 per cent in the last one month. It is too scary to see that highly volatile stocks, like, IVRCL, Lanco Infratech, HDIL, IDFC, Crompton Greaves, metal stocks falling like nine pins in a matter of one or two weeks. Even a heavyweight like, Tata Motors, has fallen by around 50 per cent since its peak of Rs 1,390 in November 2010. As a result, investors’ individual portfolios’ are showing negative returns of between 25 and 40 per cent in just one month.

My take on Indian Equities

We watch motorists walking free after spectacular crashes and burning flames in motor races. The motorist comes out unscathed because:

--- the race cars are designed keeping safety in mind

--- the race car drivers wear helmets, seatbelts and other safety equipment, and

--- quick help is at hand to rescue the drivers from accidents

Unfortunately, we investors do not follow such time-tested risk management practices in equity markets and we end up losing badly in stock market crashes. If we lose money in stock market, nobody will come and mitigate our losses! Our own misconceptions and misdeeds are responsible for our losses and we should not blame markets for our self-made losses. The simple rules for risk management are: diversification (but not over-diversification), good asset allocation, not borrowing money to invest in stocks, keeping winners and selling losers and buying only what we know.

It’s foolhardy to think that we are so intelligent that we can pick up stocks at rock bottom. The probability of our finding stocks at abysmal levels is extremely remote. Hence, the best strategy for common investors is to pick up fundamentally good quality stocks even as the Sensex has fallen by 20 per cent year-to-date to the current level of 16,150. The assumption here is that common investors are having surplus cash on hand and have the risk appetite to invest in stocks, which are one of the highly risky asset classes.

Don’t sell if you are holding good stocks, like, Bharti Airtel, Bajaj Auto, Power Grid, Hero MotoCorp, L&T, Tata Steel, BHEL, TCS, Infosys, M&M, HDFC, HDFC Bank, etc., unless you are badly in need of money. Likewise, you better stick to your companies with good pricing power: Asian Paints, Pidilite Industries, Exide, Amara Raja Batteries, Nestle, Bosch and others. There are several mid-cap companies with reasonable valuation, like, Unichem Laboratories, Maharashtra Seamless, IDFC, Coromandel International and Biocon. One needs lot of patience and total portfolio approach here. These companies have weathered many a storm and are likely to do well in uncertain and difficult times. Investors can consider investments, in a staggered manner, in good equity mutual funds, like, HDFC Top 200, Quantum Long-term Equity, Franklin India Bluechip, Canara Robeco Equity Diversified, HDFC Prudence, DSPBR Top 100 Equity, Fidelity Equity, Reliance Regular Savings Equity, Sundaram Select Midcap and exchange-traded funds, like, Benchmark Nifty and Benchmark Junior Nifty.

India’s finance minister says that the he would not be in a position to sell government stake in public sector undertakings due to stock market crash. If the government is unable to proceed with its disinvestment programme, it would further weaken the precarious fiscal situation as India is grappling with rising fiscal deficit. It will have repercussions for the government bond market.

After Sensex has fallen from 19,000 to 16,000, it’s very easy to predict that it will come down further to 15,000 or 13,000. As is well-known, stock markets go up or come down very sharply and in no time. At any point of time, we cannot rule out markets falling by 10 to 15 per cent in matter of a few weeks as there are real doubts about Indian economy growing at a respectable and reasonable rate of eight per cent annually.

For many investors, stocks look more attractive at 21,000-Sensex than at 16,000-Sensex!

Fact is stranger than fiction, do you agree?

Important Data:

Disclaimer: The author’s views are personal. He has a vested interest in the stock markets and his views should be taken with a pinch of salt. He may change his views very fast without any notice depending on the market and economic conditions. His views should not be construed as investment recommendation. Investors need to consult their certified financial adviser before making any investment decisions.

For author’s articles on financial markets, just click:

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http://www.ramakrishnavadlamudi.blogspot.com/

RBI Bought 200 Tonnes of Gold-Should You Buy It Now? - VRK100 - 04Nov2009

Dear All,

I'm not surprised by the news that Reserve Bank of India (RBI) bought 200 metric tonnes of gold, 50% of gold sold by International Monetary Fund (IMF). The moves of IMF are being watched closely for some time by one and all.

I think at this point of time everybody in the world is worried about impending inflation; debasement of national currencies in several countries, like, the US, etc; persisting problems in the frozen credit markets around the world; steep fall in US dollar; countries flooding the system with currency notes; etc. Their concerns are genuine and real.

As such, globally, investors have been flocking to gold. Honestly, I'm not sure whether we should buy gold from an individual point of time. It depends on one's asset allocation. If one is sufficiently invested in stocks, bonds, real estate and commodities and are obscenely rich; then, I think one can increase their asset allocation to gold (in fact, I'm more bullish on SILVER at this point of time) between 5 to 15 per cent of their surplues or assets. This is suitable only for the OBSCENELY RICH guys who don't need to do anything for a living.

I've a basic question for people who buy gold fearing inflation would go up to 20 or 30 per cent. Suppose imagine you're having a situation like Zimbabwe had recently. Gallopping Inflation of 3,000 per cent or 3 billion per cent or something like that. Can you exchange your gold and buy goods for your daily needs while agriculture production has reached rock bottome levels? Can you eat gold and survive? It may be a rhetorical question, but in the last one or two years, nobody has been able to answer my basic question.

If inflation goes up to 100 or 3000 per cent, the best bet would be to own a field of ten acres of arable land by a family of ten people or even more near a perennial river. So that all family members can toil and till the fields with thier own labour and grow crops organically without depending on outside world for any fertilisers, insecticides, etc. I think that's the BEST CASE SCENARIO if you want to be immune from inflation!

From a practical perspective, even owning gold cannot save people in times of crisis. Crisis times have their own dynamics and material things like gold can't save you from all-round ruin amidst a sea of difficulties. People can't imagine the situation of a runway inflation until it happens! (In a lighter vein, I can tell you that we need to learn a lot from a guy like, BEAR GRYLLS, my best Television anchor of late, in times of extreme circumstances. His survival instincts in the wild are simply superb. You can watch his spectacular survival tactics on DISCOVERY television channel daily. Discovery Channel also sells videos of his programmes if you want to watch the programmes leisurely at your own convenience)

For common people in India, I think the best investments are a portfolio of shares of stable and growth-oriented companies and equity mutual funds. What happens in India, people are not sufficiently invested in stocks and equity mutual funds. As such, I think people with surplus should invest more in stocks and equity mutual funds rather than in gold.

What's suitable for Government of India at this point of time may not be suitable for Indians. What's suitable for China may not be suitable for India. Perhaps, from a long-term point of time, acquiring gold is good for India. But, I'm not too sure about India's timing. My wild guess is that RBI's timing could have been better. But, you can't get 200 metric tonnes of gold without any impact cost. In fact, SS Tarapore, former RBI Governor, has been actively advocating for diversifying India's forex reserves into gold for the past two years. We Indians have ignored him at our own peril while China had been stocking up tonnes of gold in the last six to seven years. May be, one can say better late than never!

Last week, our gold reserves stood at USD 10 billion out of USD 285 billion of India's forex reserves. With this buy, our gold reserves are likely to go up to USD 17 billion roughly. (One can check RBI's data at the end of this week)

But I think globally gold may come down to USD 950 or 970 levels in the near future as USD seems to be gaining ground in the short term.

If USD rises, commodities may not surge. Another implication is that money may move from emerging markets to the US as had happened last year after Lehman Bros collapse. But the flow may be slow and steady, may be it would be a two-way movement, unlike previous time.

The same is happening already as we've seen broad-based selling in India and other Asian markets in the last six to seven days. But my gut feeling is that Sensex between 13,000 and 15,000 will be much more attractive keeping in mind no other country is growing except, China, India and Indonesia and a few other countries. As such, in India, we are in a sweet spot as far as stocks are concerned provided Govt of India does not botch up its finances and concentrates more on physical as well as social infrastructure.

For the time being with Sensex at 15,400; MY MANTRA is quality stocks and more quality stocks!

THE BEST ANTIDOTE FOR INFLATION IS STOCKS AND MORE STOCKS for common people in India!

Please offer your comments.

Happy investing,

with regards,

Rama Krishna V

You can read this article at the following link also:

http://www.scribd.com/doc/22087625/RBI-Bought-200-Tonnes-GOLD-Should-You-Buy-It-Now-VRK100-04112009

Please Note: RBI bought 200 metric tonnes of physical gold from IMF between October 19-30, 2009. And this was made public by RBI on 03Nov2009 via a press release.