Gold has underperformed Sensex over last three decades: FE study

The recent rise in gold prices towards an all-time high of $1,507 an ounce in the international market has added to the regard gold generally receives from Indian retail investors.

The recent rise in gold prices towards an all-time high of $1,507 an ounce in the international market has added to the regard gold generally receives from Indian retail investors. However,a comparison of the historic valuation of the yellow metal with the Indian equity market shows that gold has largely underperformed the equity market.

For ten years to 2010,gold gave an absolute return of 421% compared to a 441% absolute return given by Sensex. This was a stark contrast to 1980s and 1990s when gold lost close to 33% in value while Sensex posted impressive absolute returns. Particularly,as a result of a 200% absolute return provided by Sensex,the average gold to Sensex ratio between 1981 and 1990 stood as high as 13.

But in the past two decades,gold on an average has quoted at about 3.5 times the value of Sensex ; that is it would require 3.5 units of Sensex to buy 1 ounce of gold. While the average gold to Sensex ratio for 2011 so far is currently quoting near this level,gold has done a quick catchup with Indian equity markets over the latest decade in terms of returns.

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For the sake of the study,Sensex in dollar terms was compared to international spot gold prices in dollars per ounce,thereby adjusting for the dollar-rupee effect on returns.

According to Rajni Panikar,research head at MF Global,In isolation while gold has performed exceedingly well in last four years ,especially since the start of 2011,on a valuation perspective it is still quoting at historical gold to sensex ratio. In 2011 so far,gold has given an absolute return of 6.5% while Sensex has declined by 4.7%.

Experts say that dollar devaluation along with the lower real interest rate and higher inflation has added to the gold’s status as a safe haven. However,a rise in mine supply along with the mounting interest rate hikes across the world are the factors that could keep a ceiling on the gains in gold prices.

Given the attractive realisations offered by higher prices against the cost of production ranging in $500-550 an ounce,there could be a significant increase in mine production going ahead, added Rajni.