Gold outperforms Sensex with 50.1% returns amid global central bank demand

Mumbai: Gold has outpaced domestic equities on the return chart, riding a record rally fuelled by global central banks' voracious appetite, and growing investor demand for inflation-hedges. In rupee terms, the yellow metal has delivered a 50.1% return over the past year, compared with a 1.2% decline in Sensex.

The past year's rally has been driven largely by central bank purchases, as uncertainty stemming from tariff wars has fuelled demand for safe-haven assets.

"Central banks continue to buy gold with about 25% of purchases coming from them," says Sridhar Sivaram, investment director at Enam Holdings. "They are buying gold because of the ongoing tariff wars and as a diversification against the US treasury."

The precious metal has beaten Sensex across three, five, ten and twenty-year periods.

Over a three-year period, gold has returned an annualised 29.7% versus 10.7% for the Sensex. Across five years, the metal gained 16.5% against the Sensex's 16.1%.

Over 10 years, gold delivered 15.4% compared with 12.2% for the Sensex, while over 20 years it returned 15.2% against 12.2% of the equity index.

Analysts said after years of dependence on the dollar as the world's dominant reserve currency, many countries are now actively reducing exposure and turning to gold. The yellow metal is seen as a store of value and a hedge against currency debasement.

"Gold extends beyond being only a hedge against inflation, as the US Federal Reserve is on the stage to start cutting interest rates with hotter inflation," says NS Ramaswamy, head-commodity desk, Ventura securities. Ramaswamy said expectations of a US Federal Reserve rate cut this month and lingering uncertainty over President Donald Trump's tariff policies will continue to support gold.

Last week, gold on Comex climbed to a new all-time peak of $3,715.2 a troy ounce and silver topped $43 for the first time in 14 years.

Agencies

Outlook
Analysts said the 38% run-up in gold prices means could mean that any run-up hereon could be less sharp. Still, investors must allocate around 10-15% of their portfolios to the metal. "Investors should continue to allocate 10% to gold in their portfolios as it is the only hedge against currency, but you should not expect returns to be as high as the previous year," said Sivaram.

Ramaswamy recommends a 15% allocation to gold and use a buy on dips strategy to reach this allocation.

Some analysts said the sharp rally over the last one year has tilted the balance in favour of equities.

Edelweiss Mutual Fund's analysis of the Sensex to Gold ratio shows gold is overvalued compared to equities. When the ratio falls below 1, equities tend to outperform over the next three years, while a ratio above 1 indicates gold is likely to do better.

"The current ratio is 0.76, which is below the long-term average of 0.96," Niranjan Avasthi, SVP and head- product, marketing & digital at Edelweiss Asset Management. "In the past when this ratio had been below 0.8, the BSE Sensex has given an 3 year average forward return of 25.12% compared to gold that could return 7.21%."