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.

 

 

(article continues below)

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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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Global Market Data 31Mar2024

 

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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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Understanding Real Sensex and Currency Debasement - vrk100 - 14Mar2024

Understanding Real Sensex and Currency Debasement

 

Follow @vrk100

 

 

 

 

(This is for information 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.)

 

(Even though the article was written on 14Mar2024, the following updates dated 07Jul2024 and 24Mar2024 are added at the end of the blog) 

 

In late 1923, a loaf of bread in Germany was costing around 200 billion marks -- yes, you read it right, it was 200,000,000,000 marks.

 

People literally had to carry a cartload of money to buy a loaf of bread in Germany in 1923. 

 

After the First World War, Germany experienced high inflation. During 1922 and 1923, it turned out to be hyperinflation, which is known as Weimar inflation that happened during the Weimar Republic. The highest currency note printed at that time was in the denomination of 50 trillion marks, according to Wikipedia.  

Countries, like, Zimbabwe, Venezuela, Austria, Brazil, Hungary and Argentina too have undergone episodes of hyperinflation. 

Inflation means rise in prices and it reduces the standard of living for consumers, unless their wages too rise proportionately. There are times when rise in workers' wages will be much lower than increase in prices of goods and services.

 

Inflation is a silent killer. It's robbery by stealth. With persistent inflation, purchasing power of money comes down. Inflation hurts everybody, except the governments. 

 

 

(blog continues below)

 

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Related blog:

 

Real Sensex (inflation-adjusted) from 1990 to 2021

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Currency debasement

 

“Lenin is said to have declared that the best way to destroy a capitalist system was to debauch the currency,” wrote John Maynard Keynes.

 

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens,” he further added.

With high budget deficits, large doses of money printing and enormous debt levels, governments both in the developed and developing world have been inflating away the economies imposing heavy burden on common people.

 

When governments and central banks print money recklessly, what they do is they increase money supply without any corresponding increase in productive capacity of economies.

As a result of increases in money supply, citizens chase the same amount of goods and services with more currency or bank notes. This results in high inflation afflicting the pockets of people like you and me.

 

Lowering the value of currencies continually in economies leads to currency debasement. 

 

Currency debasement is not a modern phenomenon. It has been going on for almost 2,000 years.

 

In the first century CE, Roman emperor Nero diluted the Roman currency by reducing the weight of silver coins; and by diluting the silver used in such coins with a base alloy. This is currency debasement for you. 

 

The relentless rise in prices of crypto currencies, like, Bitcoin and Ethereum, is one of the after-effects of massive currency debasement of fiat currencies engineered by fiscal and monetary authorities around the world. 

 

Paper currencies we use today are called fiat currencies, because governments can create them by fiat. In the olden days, currency coins used to be backed by precious metals, like gold and silver. This is no longer the case. 

 

In a way, the advent of crypto currencies, which have a total market cap of USD 2.75 trillion as of today, as an asset class is a kind of rebellion against fiat currencies, that are getting diluted every day. 

You may be aware the supply of Bitcoins, for example, is controlled and as such it's seen as a counter to debasement of fiat currencies.

 

However, we don't know how long this arrangement continues for Bitcoin and how the fiscal and monetary authorities respond to the rise of crypto assets. Significantly, the US SEC has recently approved spot Bitcoin ETFs in the US.

Now, let us discuss how Sensex looks like in real terms, that is, when adjusted for inflation.

Real Sensex

A few days ago, India's benchmark stock market index, Sensex, reached a record high of over 74,000. Equity investors are in high spirits. Naturally. Sensex has risen from a level of 38,000 five years ago, almost doubling in value. 

There is a catch here. What investors see here is only in nominal terms, but not in real terms. Real terms means we need to adjust or correct Sensex for inflation. 

Cumulative consumer price inflation (CPI) in India in the past five years is around 32 percent, as per official numbers declared by Government of India. (It may be noted the official inflation figures declared by governments are manipulated to suit the finances of the governments. Actual inflation will be much higher than the official numbers).

If you adjust the 74,000 Sensex level with 32 percent inflation, you will get a level of nearly 57,450 for Sensex. It means, real Sensex in the past five years has grown from 38,000 to 57,450, an annualised return of 8.62 percent (51.4 percent absolute return) in real terms.

But in nominal returns, which everybody observes, Sensex has given an annualised return of 14.26 percent (94.7 percent absolute return).

The difference between 94.7 percent nominal Sensex return and 51.4 percent Sensex real return is 43.3 percent in the past five years. 

Investors feel comfortable looking at the nominal return, while ignoring the real return adjusted for inflation. The difference of 43.3 percent in the past five years is eaten away by inflation monster.

"Plots of historical stock price indices in the media are almost invariably shown in nominal terms, not the real (inflation-corrected) terms," wrote Robert Shiller in his epic book "Irrational Exuberance."

We are unable to appreciate the impact rising prices have on our finances. We only see things in nominal values, not in inflation-corrected real terms.

CPI inflation is nothing but rise in prices of a basket of goods and services consumed on average by households. Of course, the basket keeps on changing from time to time -- depending on changes in consumer preferences. 

 

Maybe, we are consuming a broader range of goods and services in recent decades.

Since hitting a record high of 74,000 on 07Mar2024, Sensex has declined to 72,700 as at close of yesterday.

 

India's Economic Reforms were started in 1991. So, the following is a table detailing the rise of Sensex since 1990 and its yearly growth in real terms, that is, corrected for inflation:

 

 

 

As shown in above table, Sensex was 781 as on 31Mar1990 and it reached a nominal level of 72,762 yesterday; while the real Sensex grew from 781 to a mere 7,073 in the same period.

The table also shows the real Sensex return for each financial year since 1990. As can be observed from the 34-year data: in real inflation-adjusted terms, Sensex has given positive returns in 20 years, and provided negative returns in 14 years.

 

Real Sensex growth in 34 years

In nominal terms, Sensex grew from 781 in 1990 to 72,762 now, a compounded annual growth rate (CAGR) of 14.3 percent, which looks impressive over a long period.

But when you adjust or correct Sensex for inflation, real Sensex grew from 781 in 1990 to 7,073 only showing a moderate CAGR of 6.7 percent -- the difference between nominal and real Sensex growth reflects its erosion by inflation. 

Consumer price index in the past 34 years has gone up by 10.29 times -- as per official numbers (that is, if you believe them). When you divide the nominal Sensex level of 72,762 by 10.29, you get real Sensex of 7,073.

Table >

What really matters is real Sensex and real returns, that are adjusted for inflation, not the nominal returns we are fed by the media every day. 

 

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P.S.: After writing the blog, the following updates are added with new information / images:

 

 

Update 07Jul2024 :  After four months of writing the blog, I'm now updating the real Sensex data with latest Sensex figures after adjusting the nominal Sensex with latest available CPI inflation. 

 

On 05Jul2024, nominal Sensex ended at 79,997. After correcting for CPI inflation, the real Sensex is only 7,700. Real Sensex given here reflects the impact of inflation (rise in prices of goods and services) since 1990.

 

Growth of nominal Sensex between 31Mar1990 and now (05Jul2024) is more than 100 times, but growth of real Sensex in the same period is just 9.86 times -- the difference is due to erosion of Sensex by price rise or inflation.

(please click on the chart to view better)

Update 24Mar2024 :  How much returns did Sensex and real Sensex give on a 5-year rolling return basis between 1990 and now? 

 

The following table provides the rolling return data as at the end of every financial year between 1995 and now based on data from 1990 > 

 

The returns shown in the table are absolute, not annualised. 

As on 31Mar1995, Sensex 5-year return is 317 percent absolute (not annualised). As on 31Mar2020, the 5-year return is just 5.4 percent as global stocks, including those in India, collapsed in Mar2020 due to outbreak of COVID-19 Pandemic.

 

Of the 30 data points (as per table 2 below), Sensex had given negative returns only three times, that is, as on 31Mar1997, 31Mar1999 and 31Mar2003 -- but real Sensex had given negative returns nine times out of a total 30.

Obviously, this 5-year rolling return data are only from a small sample of data as at the end of a financial year -- if you take 5-year rolling returns for Sensex on a daily or a monthly basis, the data may provide better insights.

(Please click on the image to view better)

 

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References and Additional notes:

 

India's CPI inflation from 1990 to 2023:

Trading Economics: India CPI for the past 12 months

 

In 1923 Germany, Children use bundles of bank notes as building blocks (source: Mashable)

 

Germany hyperinflation / Weimar inflation of 1922 and 1923 (GCSE Modern World History)

Gresham's Law Investopedia - "Bad money drives out good." - during the Revolutionary War in the US, bad paper money drove out all valuable gold and silver coins (good money) from circulation - 

Currency / silver coins debasement under Nero - Gresham's Law mentioned here

50 trillion mark bank note in Germany

 

Inflation and Fall of Roman Empire - St Louis Fed PDF with chart

CoinMarketCap crypto currencies market cap

Tweet 11Jan2024 US SEC approves spot Bitcoin ETFs

RBI Handbook of Statistics on Indian Economy (HBIE)

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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. 

CFA Charter credentials  - CFA Member Profile

CFA Badge

  

Viewing Options for this blog in different formats:

 

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He blogs at:

https://ramakrishnavadlamudi.blogspot.com/

https://www.scribd.com/vrk100

X (Twitter) @vrk100