Gold vs. Small Caps: A Cyclical Pattern
This is a ratio chart comparing gold (in INR) to the CNX Small Cap Index over the last 20 years. The chart shows an interesting cycle where the ratio fluctuates between 1.3 on the higher side and sometimes even as low as 0.2. This repeating pattern highlights how the performance of gold and small caps moves in cycles, sometimes favoring one asset class over the other.
Market Trends and Their Impact on the Ratio
Between 2004 and 2008, the stock market was booming, and small caps were rising faster than gold. As a result, the ratio declined. Then came 2008-09, when small caps crashed, but gold was already in an uptrend, causing a sharp increase in the ratio. This trend repeated multiple times, such as from 2013 to 2018, when small caps performed well, pushing the ratio down. From 2018 to 2020, small caps were weak, but gold performed steadily, leading to a rise in the ratio again.
Current Market Scenario
Since 2020, small caps have outperformed gold in absolute returns, causing the ratio to decline again. However, now this ratio appears to be turning upwards. Historically, whenever this has happened, gold has outperformed small caps in the following years. This could mean one of several scenarios—either gold rises faster than small caps, small caps stay stagnant while gold continues to rise, or small caps decline while gold remains steady.
What This Means for Investors
Investors should take note of this trend because it suggests that gold might deliver better relative returns than small caps in the near future. This doesn’t mean small caps won’t grow, but gold may grow at a better pace. Having some allocation in gold can help balance a portfolio, especially if the trend continues as it has in previous cycles.
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