Nifty vs Gold
There is an interesting way to compare the Indian stock market with gold. The Nifty-to-gold ratio shows how expensive or cheap Nifty is compared with Indian gold. Looking at nearly 35 years of data, the ratio has mostly stayed within a fixed range.
Around 90% of the time, it has remained inside this range. There was one major exception in 2008, when stocks had performed much better than gold and the ratio moved outside the normal range.
When Nifty Looks Cheap
The most useful part of this chart is when the ratio moves near its lower levels. When this happens, Nifty is relatively cheap compared with gold. These periods can be good times to look at stocks. After the 2008 market crash, Nifty became cheap compared with gold. A similar buying point appeared around 2012. Another important point came during the COVID market fall in 2020. In all these periods, the ratio was near the lower side before Nifty started moving higher.
The Same Happened Before
This pattern can also be seen in earlier years. A similar Nifty buying point appeared around 2003. There were also such points around 1998 and 1995. The idea is simple: when the Nifty-to-gold ratio is near the bottom, stocks may be cheaper compared with gold. When the ratio moves higher, the situation changes. Gold may then look cheaper compared with Nifty.
When Gold Looks Better
The reverse side of the chart can help identify periods when gold looks attractive. Around 2018, the ratio suggested that gold was relatively cheap compared with Nifty. Another good period for gold came around 2022. This does not mean that investors should completely leave stocks and move into gold. Instead, the chart can help investors understand which asset looks cheaper compared with the other.
Change the Allocation
The main idea is not to choose between Nifty and gold. It can make sense to own both. What can change is the allocation between them. When the ratio is near the bottom, an investor could consider a higher Nifty allocation. When the ratio moves toward the higher side, the allocation could become more balanced.
A Simple Market Signal
The Nifty-to-gold ratio is not a perfect tool for predicting the market. But it gives a simple way to see whether Nifty looks cheap or expensive compared with gold. Instead of asking whether Nifty or gold is better, investors can use this chart to think about how much of each asset they want to own. The key is to watch the ratio and adjust the balance when the relationship between stocks and gold changes.
