Gold prices ahead of Sensex on YTD, 5-year basis

The past few years have been good for equity investors with a big rise in stock prices in 2020 and 2021.

This has acted as a magnet for investors, and led to a record number of equity-trading and demat accounts being opened.

However, it has been even better for traditional investors who put their money in precious metals such as gold and silver.

After the recent rally in such metals, gold has started outperforming equities and silver is just notch below them (see the adjoining charts).

Gold prices in the domestic market are up 12.6 per cent year-to-date compared 0to a 6.7 per cent rise in the Sensex during the period.

According to the data from the India Bullion and Jewellers Association (IBJA), 24-carat gold closed at ~53,914 per 10 gm in the Mumbai market on Friday, up from ~47,980 at the end of December 2021.

The Sensex rose from 58,254 at the end of CY21 to 62,182 on Thursday.

The yellow metal is ahead of equities in the longer term. Gold prices in India are up 78 per cent in the past five years against a 73 per cent rally in the Sensex during the period.

Silver is ahead of equity on year-to-date but has underperformed both gold and equity on a five-year basis. The white metal is up nearly 22 per cent from its 52-week low in August this year compared to a 6 per cent and 4.5 per cent rise in the gold and the Sensex, respectively, during the period.

Thanks to its recent rally, silver is up 7 per cent year-to-date and has gained 69.3 per cent since January 2018, marginally behind the Sensex.

The two precious metals are also outperforming equities in the global markets.

For example, in the US, gold prices are down around 1 per cent year-to-date while silver prices are unchanged during the period.

In contrast, the benchmark Dow Jones Industrial Average (DJIA) is down around 7 per cent year-to-date.

Gold was trading at $1,815 per troy ounce at New York’s International Commodity Exchange on Friday, down marginally from $1,829.3 at the end of December 2021.

In the same period, silver remained flat at around $22.3/oz, while the Dow Jones was trading at 33,781 on Friday, down from 36,338 at the end of December last year.

Just like in India gold and silver have also outperformed US equities on a longerterm basis. Gold is up nearly 34.7 per cent in the past five years in dollar terms while silver has increased 34.5 per cent since January 2018, against a 29.2 per cent rally in the Dow Jones Industrial average in the period.

Many analysts expect a pause in the recent rally in prices of the precious metals as the world’s major central banks do more rate hikes to tame inflation.

“Though we witnessed a rally in gold prices, the same may be restricted due to the future rate hikes. The Fed may continue to hike rates well into 2023 and other global central banks hiking rates may also restrict gold price rally,” write analysts at Emkay Wealth management.

In the domestic market, however, precious metals will beat equities if India’s external economic indicators remain week.

“Gold may outperform the equity market if India continues to run a large current account deficit and capital inflows remain weak, putting pressure on the rupee,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory Services.

However, if the price of crude oil declines, leading to an improvement in India’s current account deficit, it will give a boost to the equity market and gold may underperform.

The near-term prospects are bright for silver, which, unlike gold, has many industrial uses.

The Silver Institute now expects a supply shortfall for silver in 2022 due to higher than expected demand from the solar and electric vehicle industries.

This is expected to keep silver prices high and may support a rally in the metal in 2023 as well.