Best time to buy Gold !

November 8, 2023 4 min read

Gold to Nifty Ratio

When it comes to investing, having the right allocation between different asset classes can make a significant impact on your portfolio’s performance. One ratio that investors often overlook but can provide valuable insights is the Gold to Nifty ratio. In this article, we will explore what this ratio signifies and how it can be used to allocate assets effectively.

Understanding the Gold to Nifty Ratio

The Gold to Nifty ratio is a unique ratio that measures the relationship between the international gold price and the value of Nifty, an index that represents the performance of the top 50 stocks listed on the National Stock Exchange of India. The formula to calculate this ratio involves multiplying the international gold price by the USDINR exchange rate and an additional taxation factor, and then dividing it by the grams per troy ounce and the value of Nifty.

TVC:GOLDFX_IDC:USDINR1.15/31.303

A 30-plus-year chart of this ratio reveals interesting patterns.

The ratio typically oscillates between 0.3 on the downside and 0.7 on the upside. Although it has occasionally reached extreme levels of 0.2 and 0.9, the range between 0.65 and 0.70 has been the most dominant. Understanding these fluctuations is crucial for making informed investment decisions.

The Gold to Nifty ratio provides insights into the relative strength and weakness of stocks and gold. When the ratio falls, it indicates that stocks are performing well while gold is underperforming. Conversely, when the ratio rises, it suggests that stocks are weakening, and gold prices are increasing.

By analysing historical data, we can observe that the ratio falls during periods of strong equity markets. For example, from 2003 to 2008, equity markets were robust, resulting in a decline in the ratio. Similarly, during the years 2013 to 2015 and 2020 to 2021, strong equity markets led to a decrease in the ratio. On the other hand, the ratio rises when stocks experience a downward trend and gold prices surge. Instances such as the stock market crash of 1992-1993, the dot-com bust from 2000 to 2003, and the equity crash from May 2019 to March 2020 are all reflections of this phenomenon.

Utilising the Ratio for Asset Allocation

Based on the historical patterns, the Gold to Nifty ratio can be used as a guide for asset allocation decisions. When the ratio is in the lower range of 0.65 to 0.7, indicating a strong equity market, it is advisable to reduce gold allocation and increase exposure to equities. Conversely, when the ratio is in the higher range below 0.3, suggesting a weak equity market, it is wise to increase gold allocation and reduce exposure to stocks.

One important observation is the infrequency of extreme levels in recent years. While the ratio attempted to reach these levels in 2013, it failed to do so. However, considering the repetitive nature of these cycles over the past three decades, it is reasonable to assume that they will occur again. The key question is whether equities will decline, causing gold prices to rise, or if both equities and gold will rise, with gold outperforming equities. Regardless, allocating more to gold when the ratio is in the lower range has historically been a prudent strategy.

The Significance of the Ratio Chart

The Gold to Nifty ratio chart serves as a valuable tool for investors, signalling high probability areas for accumulating gold. While it cannot provide precise timing or magnitude predictions, it identifies the favourable range for gold allocation. Whether or not you are reducing equity allocation, increasing your allocation to gold within this ratio range can be considered. 

Investors should be cautious not to view this ratio as a stand-alone indicator but rather as one component of a comprehensive investment strategy. It should be used in conjunction with other fundamental and technical analysis tools to make well-rounded asset allocation decisions.

If you have any questions, please write to support@weekendinvesting.com

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    Best time to buy Gold !