Gold vs Equity: Is it the right time to rejig exposure in stock market and yellow metal?

Gold prices have delivered a stellar 12.55% annualized return over the past 25 years, outpacing the 10.73% generated by Indian stock market benchmark index Sensex. However, a closer look at historical trends suggests that equities have consistently outperformed gold over longer periods, reinforcing their role as a superior wealth creator.

A report by Edelweiss Mutual Fund provides a reality check on gold price’s performance relative to equities, highlighting the importance of rolling returns in assessing long-term investment potential.

Gold vs Equity: A Rolling Returns Perspective

While gold appears to be in a strong rally, rolling return analysis paints a different picture.

- 5-Year Rolling Returns (Since 1984): The Sensex has historically delivered an average return of 14.63%, compared to gold’s 10.28%. Sensex has outperformed gold in 65% of observations, making it the preferred choice for medium-term investors.

- 10-Year Rolling Returns (Since 1984): The dominance of equities becomes even clearer over longer horizons. Sensex has delivered an average return of 13.55%, while gold has lagged at 9.85%. Equities have outperformed gold in 64% of the cases, reinforcing their long-term growth potential, Edelweiss Mutual Fund report showed.

Sensex-to-Gold Ratio: A Key Indicator

Investors often assess the relative valuation of gold and equities using the Sensex-to-Gold Ratio. A low ratio indicates potential outperformance of equities, while a high ratio favors gold.

Historically, when the ratio falls below 1, equities tend to outperform over the next three years. Conversely, when it rises above 1, gold has an edge. Currently, the ratio stands at 0.86, below the long-term average of 0.96, suggesting that gold is slightly overvalued compared to equities.

What Should Investors Do?

Gold prices have historically served as a hedge during economic uncertainty, while equities have driven wealth creation during periods of growth. Given the current Sensex-to-Gold Ratio and past trends, equities could be poised to outpace gold over the next three years, according to the Edelweiss Mutual Fund report.

For investors, the key takeaway is diversification. While equities remain the primary engine for long-term returns, maintaining some exposure to gold can help manage risks during volatile market phases.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.