A significant and continuing rise in the price of gold could be the precursor to a substantial upswing in the Indian stock market over the next year, a new analysis from JM Financial suggests. The report delves into historical market data to reveal a compelling connection between periods of gold appreciation and subsequent strong performance in domestic equities.
The Historical Link Between Gold and Equities
According to the detailed study by JM Financial, a reliable pattern has been observed over the last three decades. The key indicator is the Nifty/gold ratio, which measures the performance of the National Stock Exchange's benchmark index against the value of gold. The report found that when this ratio hits a trough, or a significant low point, it has consistently acted as a powerful signal for equity markets.
"A trough in the Nifty/gold ratio is followed by positive returns in equities in the subsequent 12 months," the analysts at JM Financial emphasized. This phenomenon has reinforced optimism about the near-term prospects for domestic risk assets like stocks.
Strong Returns Following Ratio Lows
The historical data provides concrete numbers to back this claim. JM Financial's research shows that in six out of the nine previous instances where the Nifty/gold ratio reached a trough, the Nifty index recorded appreciable gains. The average performance after such a low point is particularly impressive.
On average, the Nifty climbed 2.8% in one month, 15.1% in three months, 28.9% in six months, and 31.9% over a 12-month period following the identified troughs. This data paints a clear picture of sustained growth potential triggered by the gold-equity dynamic.
RBI's Strategy and the Unsustainable Gap
Adding another layer to the analysis, JM Financial also pointed to the Reserve Bank of India's (RBI) historical behaviour. The central bank has traditionally increased the share of gold in its foreign exchange reserves during times of crisis. This strategic move is executed both through fresh purchases of gold and by reducing exposure to other foreign currency assets.
According to the report, these adjustments by the RBI have typically coincided with strong performance in gold, which is then followed by a robust rebound in domestic equities. Furthermore, the firm's analysis highlights that the current divergence between gold prices and the US Dollar Index seems "unsustainable."
While this gap might lead to some moderation in gold rates if the US dollar strengthens, JM Financial believes that expectations of accelerated interest rate cuts by the US Federal Reserve could prevent a prolonged rally for the dollar. With the Nifty currently valued close to one standard deviation from its long-term mean, the ongoing rally in gold might very well be the setup for an upbeat phase for Indian stocks in the coming year.
