Sensex Gold Ratio

Posted On Monday, Jan 25, 2010

Gold began its bull run in 2001, and a noticeable pattern of this run was the consolidation phase post the attainment of a peak. Presently the price of gold seems to be in a correction / consolidation phase post their peak at $1226 levels.

With regards to equities, increased flows and bullish expectations were leading indices higher until we saw some correction in the past two days following global cues.

Although equity indices were moving upwards globally, the fact that the price of gold were at elevated levels suggests that there is still a lot of anxiety in the markets, cautioning about the possibility of ensuing trouble in the financial world. Now, economists wonder, whether this trouble will come in the form of a double dipped recession, a dollar or bond crisis, stagflation, inflation, or deflation.

Back home there have been mixed opinions on where our stock markets are headed. Some experts predict a correction whereas some expect more gains. However, we looked at some past data to gauge what the relative valuations of gold and Indian stock markets have in store for us.

We tried to evaluate the relative relationship between the Indian stock markets and the price of gold. For stocks we chose the Sensex as a barometer, and to establish a historical relationship we calculated a ratio known as "Sensex Gold Ratio".

The equity/gold ratio highlights a commonly used measure of corporate market value (i.e the Sensex) versus a decades-long measure of real asset value (i.e gold).

Chart: Sensex Gold Ratio
Quantum Mutual Fund_Sensex Gold Ratio
Source: Bloomberg * Gold price data in INR used for calculation of ratio is without any applicable levies / taxes / duties.

The current ratio stands at 1.06 vis-à-vis its long term average (since 1979) of 0.70. This long term average considers the data in entirety and helps us evaluate the relative value during different business cycles.

The higher ratio relative to its long term average tells us that either the Sensex is overvalued or that gold is undervalued.

The table below provides an insight on the various scenarios that can evolve if the Sensex Gold ratio retraces back towards its long term average of 0.70.

Table I: Sensex Gold Ratio Scenario Analysis




Gold (Rs. / 10 grams)

Current Levels#




If the Sensex Gold Ratio retraces back to its long term average of 0.70



Projected Sensex

Projected Gold

If Sensex remains unchanged




If Sensex further falls by 15% from current levels




If Sensex increases to 21,000




If Gold Remains unchanged




*The Table above is purely illustrative and indicates potential gold prices assuming Sensex / Gold ratio at 0.70. Actual Sensex / Gold ratio may be higher or lower than 0.7.Past performance may or may not be sustained in future. # Data as on 21st January 2009, Gold price data in INR is without any levies / taxes / duties applicable. Source: Bloomberg,

India’s growth story has been buzzing with high expectations. In such a case, it looks unlikely that index levels would fall significantly unless we have another major catastrophe in the global economy. Therefore, going by the long term historical average, gold prices seem to be poised for an upward trajectory.

If history gives us an opportunity to peek into the future, we could well say that gold has tremendous potential to do well.

This correction in gold prices seems to be an ideal opportunity to increase allocation to gold. Make the most of this opportunity and Invest in gold before it heads higher.

The views mentioned in this article are general recommendations and their relevance would differ from individual to individual. It is hence advised that portfolio allocations are made in consultation with your financial planner.
The views expressed in this article are of Quantum Asset Management Company Pvt. Ltd., and is in no way a definite prediction on trends of Gold. The views are based on past trends in the bullion markets, which may or may not be sustained in the future.

Investment Objective: Quantum Gold Fund’s (QGF) investment objective is to generate returns that are in line with the performance of gold, subject to tracking errors. Asset Allocation: QGF will primarily invest in physical gold and if allowed under SEBI Regulations, also in gold related securities, but may invest in money market instruments to meet liquidity needs. Terms of Issue: QGF is an open-ended Exchange Traded Fund. Each unit of QGF will be approximately equal to the price of half (1/2) gram of Gold. Units will be issued at NAV based prices. On an ongoing basis direct purchases from the Fund would be restricted to only Authorised Participants and Eligible Investors. Units of QGF can be bought /sold like any other stock on the National Stock Exchange of India Ltd (NSE) or on any other stock exchanges where it is listed. Entry Load: Nil Exit Load: In case of QGF: Nil in case of Authorised Participants; 0.5% in case of Eligible Investors. Risk Factors: All Mutual Funds and securities investments are subject to market risks including uncertainty of dividend distributions and the NAV of the schemes may go up or down depending upon the factors and forces affecting the gold and securities markets and there is no assurance or guarantee that the objectives of the scheme will be achieved. Quantum Gold Fund, is the name of the scheme and does not in any manner indicate either the quality of the Scheme, its future prospects or returns. Scheme Specific Risk: QGF is the first gold scheme being launched by the AMC. The AMC has no previous experience in managing gold scheme. The QGF’s NAV will react to the Gold price movements. The Investor may lose money over short or long period due to fluctuation in Scheme’s NAV in response to factors such as economic and political developments, changes in interest rates and perceived trends in bullion prices, market movement and over longer periods during market downturns. Trading volumes, settlement periods and transfer procedures may restrict the liquidity of these investments of the QGF. It is to be distinctly understood that the permission given by NSE should not in any way be deemed or construed that the Scheme Information Document for QGF has cleared or approved by NSE nor does it certify the correctness or completeness of any of the contents of the said Scheme Information Document. The investors are advised to refer to the Scheme Information Document of QGF for full text of the ‘Disclaimer Clause of NSE’. Statutory Details: Quantum Mutual Fund (Fund) has been constituted as a Trust under the Indian Trusts Act, 1882.Sponsors: Quantum Advisors Private Limited. (Liability of Sponsor limited to Rs. 1,00,000/-)Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited (AMC). The Sponsor, Trustee and the Investment Manager are incorporated under the Companies Act, 1956. The past performance of the Sponsor / AMC/ Fund has no bearing on the expected performance of the scheme. Mutual Funds investments are subject to market risks. Please read the Scheme Information Document / Key Information Memorandum / Statement of Additional Information / Addenda carefully before investing. Scheme Information Documents /Key Information Memorandums/ Statement of Additional Information can be obtained at any of our Investor Service Centers or at the office of the AMC 107, Regent Chambers, 1st Floor, Nariman Point, Mumbai -400021 or on AMC website www.QuantumAMC.Com
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