Nifty vs gold: Which is a better option now?

Investing may seem easy for many, as they feel comfortable buying and holding a stock for years. But have you ever considered the concept of asset allocation? Diversification across different asset classes is critical to managing risk and improving the potential for returns.

And now, given the sharp rise in volatility, it may be time to focus on getting this right.

The Nifty’s recent fall and the case for gold

The Nifty has experienced its largest weekly decline of 4.45% (last week), the biggest since June 2022. This bearish momentum has extended into this week, particularly in the mid- and small-cap baskets.

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Given the current market trend, now is the time to reconsider your asset allocation. Profit booking on the D-Street signals caution, and reallocating some investments from equities to gold might be a prudent strategy.

Ratio chart analysis: Gold/Nifty50 ratio

A ratio chart compares the performance of two assets. In this case, the gold/Nifty50 ratio chart highlights how one asset performs relative to the other. If the ratio rises, it means gold is outperforming the Nifty; if it falls, the Nifty is outperforming gold.

The MCX Gold Futures/Nifty50 ratio chart shows that the slope has turned northward from a multi-year support zone. This suggests that gold could outperform the Nifty in the coming months.

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It is on the verge of breaking from the channel on the ratio chart, reinforcing this bullish scenario with three potential outcomes:

1. Gold and the Nifty both rise, but gold rises more.

2. Gold rises while the Nifty falls.

3. Both fall, but gold falls less than the Nifty.

MCX Gold: A bullish breakout

The MCX Gold chart supports this view. On the Daily 1% X 3 point and figure (P&F) chart, MCX Gold has broken out of a triple top breakout (TTB) pattern, which signals a bullish scenario.

The P&F chart, widely used for identifying trends, suggests that gold’s bullish momentum is strong in the short-to-medium term, positioning it to outperform the Nifty in the coming weeks and months.

In light of these technical indicators, it may be worth considering reallocating funds to gold or increasing gold holdings if it is already part of one’s portfolio.

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The favourable slope of the gold/Nifty ratio chart, coupled with the bullish momentum in gold, presents a compelling case for a shift in asset allocation.

Of course, the final decision should be taken only in consultation with your financial advisor.

Note: The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only.

As per Sebi guidelines, the writer and his dependents may or may not hold the stocks/commodities/cryptos/any other assets discussed here. However, clients of Definedge may or may not own these securities.

Brijesh Bhatia has over 18 years of experience in India's financial markets as a trader and technical analyst. He has worked with the likes of UTI, Asit C. Mehta, and Edelweiss Securities. Presently he is an analyst at Definedge.

Disclosure: The writer and his dependents do not hold the securities discussed here, though they have exposure to gold. However, clients of Definedge may or may not own these securities.