I recently plotted an interesting chart comparing the Nifty index with gold prices over the last 35 years. This is a ratio chart, meaning it shows how Nifty performs relative to gold. The chart reveals a clear oscillating pattern, where the ratio moves between two broad ranges. On the lower side, the ratio tends to bottom out near 1.6, while on the higher side, it peaks around 4.05.
Why Does This Ratio Oscillate?
The reason for these fluctuations is that sometimes Nifty outperforms gold, pushing the ratio up, while at other times, gold outperforms Nifty, bringing the ratio down. Periods when Nifty is significantly stronger than gold include the Harshad Mehta bull run, the 2003-2008 rally, the post-2012 surge, and the 2020-2022 period. During these phases, equities surged ahead while gold lagged.
Conversely, whenever gold takes the lead, the ratio declines. This does not necessarily mean that equities have to fall. It can also mean that gold is rising at a much faster pace than stocks, or that stocks are staying flat while gold rallies. In some cases, both may decline, but gold falls at a slower rate than stocks. Such scenarios played out after the 1992 boom, the dot-com bubble, the 2008 financial crisis, the 2011-12 slowdown, the COVID crash, and now once again in 2024.
What This Means for Investors
The current trend suggests that gold is likely to outperform stocks in the near future. This does not imply that equities will stop growing, but rather that gold could deliver better relative returns. If you dynamically allocate gold in your portfolio, this is the phase where you should be increasing your exposure to gold, as it is expected to do well.
When the ratio eventually falls near the 1.5-2 range, that will signal a shift in trend. That will be the time to start reducing gold allocation and increasing equity exposure, as stocks will likely regain strength. The key is to use this ratio as a guiding tool for asset allocation rather than trying to time the market perfectly.
Balancing Equity and Gold for a Healthy Portfolio
By adjusting your portfolio based on this long-term trend, you can ensure a healthier overall performance. When the ratio is high, favor gold; when it is low, favor equities. This simple but effective approach helps maintain balance and reduces risk. Instead of getting caught in market noise, this strategy allows you to allocate your money efficiently based on relative strength.
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