A Chartist's View on Sensex versus Gold

May 10, 2016

In this issue:
» Banks' corporate loans at 7 year low
» Is India Inc. in a deleveraging mode?
» Today's market update
» ...and more!
Tanushree Banerjee, Co-Head of Research

Our colleague and charting specialist, Apurva Sheth, editor of Swing Trader, recently dug deep into his charts to confirm his view on our 'Sensex 70% upside' prediction. He wanted to corroborate or contradict our long term-view on stocks with his opinion on the near-term potential. He provided our subscribers with three charts. And he gave the opinion that every smart trader would need on near term Sensex upside based on chart patterns (requires subscription). Rahul, our team, and I would never be able to tell you something like that.

So this time when we gave an opinion on long term allocation between equities and gold, we thought why not give you a view on their charts too? And who better than Apurva to help us with that?

Once again Apurva did some solid chart reading...

And this time he came up with a technique to optimize Gold and Sensex returns with a simple tool - Ratio Charts. With this tool one can increase or decrease exposure in gold or equities to optimal levels.

So make sure you read Apurva's every word carefully!


Apurva Sheth, Author, Profit Hunter What's a better investment - equities or gold? Everyone has their favorite depending on their views and biases (sometimes very strong views). But you can't deny they both put up a tough fight.

Rahul Shah recently shared his thoughts on this perennial debate.

He argues that the Sensex is a good proxy for India's economic potential. It represents the largest companies from which you can expect a certain earnings stream. Gold, on the other hand, is the perfect inflation hedge. It is real money and the only currency that retains its purchasing power over the long term.

Equities fulfill the investment objective of growth. Gold meets the objective of safety. But as an investor, what should you do? Invest in one? Ignore the other?

Never. You should invest in both. You should always diversify your investment portfolio across both assets.

But gold and equities do not perform well all the time. At times, gold will outperform the Sensex and vice versa. So if we are able to identify when one has the advantage over the other, we can optimise our investment returns.

I will show you how by drawing a simple ratio chart of the Sensex to gold.

Ratio Chart of Sensex to Gold
Ratio Chart of Sensex to Gold

I have divided the price of the Sensex by the price of ten grams of gold traded on the MCX from 2004 and plotted the values on this chart. The base or starting point for both gold and the Sensex is 100.

The ratio trades in a range of 50 to 200. You will notice the line mostly trends up from January 2004 to January 2008. The Sensex outperformed gold by a wide margin during this period. This was when economies across the globe were firing on all cylinders. India was no exception, and the buoyancy was reflected on the benchmark indices.

But the line fell sharply after topping out in 2008 and hit the bottom of the chart in March 2009. Since then, the line has traded in a range of 50 to 110.

How can we use this chart to optimise our returns?

We can use the Sensex-to-gold ratio as a tool to calibrate our exposure in these asset classes. You can reduce exposure in gold and increase exposure to the Sensex or equities when the ratio is near the bottom or close to 50 levels. This is when equities are generally beaten down compared to gold, so it makes sense to increase your allocation to equities.

When the ratio is close to 110, one should consider reducing exposure to the Sensex or equities and increasing exposure to gold. This has worked well over the last seven years when the economy has struggled.

Going forward, if the Sensex-to-gold ratio is significantly below 110, and if the Sensex looks grossly undervalued, one can continue with a greater exposure to equities. However, once the ratio touches 110, it's time to assess the overall economic environment. If it isn't convincing, then it's time to reduce your allocation to equities and increase you gold holdings.

That's how you use charts to adjust your exposure to gold and equities for optimum returns.

On what basis do you decide your allocation to gold and equities? Let us know your comments or share your views in the Equitymaster Club.

--- Advertisement ---
Profit From Junior Blue Chips...

We have released our latest Special Report on the best of the best small caps - Junior Blue Chips!

Yes, we believe Junior Blue Chips possess the high growth potential of small caps along with the stability of blue chips.

That is an amazing combination every investor would want in his portfolio.

And the best part is you can get this report for FREE!

Just click here to know how...

2.55Chart of the day

Vivek Kaul recently gave a very detailed insight into why banks' deposit growth is at a 53 year low.

Here is what he wrote...

  • Banks make loans from deposits which they are able to raise. And if the deposit growth is almost at an all-time low, their ability to cut interest rates on their loans, will be limited. If banks cut deposit rates any further, the deposit growth will fall further and this will hurt their ability to give out loans.

He elaborated further...

  • The point is that if the loan growth does pick up a little more from here, the incremental credit deposit ratio is likely to get worse in the days to come. If we take this possibility into account, banks will have a tough time cutting down their deposit rates any further. And that being the case, the chances of lending rates being cut further are limited.

So we are hardly surprised that even banks' incremental lending to corporates is currently at a 7 year low.

But what is worrying is the fact that bank lending to the infrastructure sector accounted for a third of total loans in FY16. Moreover, last fiscal, bank lending to the struggling metals and metals sectors accounted were 15% of corporate loans. Putting it bluntly, over half of bank credit to industry is to the troubled infrastructure and metals sectors. Over 55% of the incremental corporate loans went to the infrastructure sector. Another 38% went to the iron and steel sector. Now, unless there's a turnaround soon in these businesses, the lenders are bound to be in deep trouble.

Corporate loans at 7 year low. But to troubled sectors!
Corporate loans at 7 year low. But to troubled sectors!


As you know, we have been claiming that Sensex and other bluechip companies are likely to deliver upto 70% earnings upside over the next three to four years. Why do we feel so? Well...it is a function of probabilities and basic statistics.

You see, India Inc.'s earnings quality and growth has been at its multi-year low in recent times - especially in the last two years. Asset turnovers are at their decadal lows. The same holds true for the profit margins as well. This has only gone on to impact the companies' earnings quality, which to an extent has an impact on valuations their stocks garner.

While the investment cycle is yet to take off, we do believe that reversion to mean only increases the odds of Indian companies reporting above average growth rates going forward. And this earnings growth will only get fueled by the falling interest rates coupled with the fact that Indian companies are in their deleverage mode.

As reported Business Standard, State Bank of India has released an economic update that suggests Indian companies are deleveraging in a meaningful manner. As per the report, out of the 200 companies that were studied, 30% of them have reported lower debt levels as compared to the previous fiscal. The total debt reduction for this lot stands at about Rs 69 billion. Sector wise, the sharpest decline has been in the cement, finance, trading and fertilizers spaces.

We believe such a trend only reinforces our belief that the odds of fetching good returns from the best bluechips are stacked in your favour currently.

By the way, the StockSelect team is working on a report on bluechips in the Sensex and beyond it have high earnings growth possibilities. Expect more update on this in the next 30 days.

  • HDFC or State Bank of India?
    Tata Motors or Maruti Suzuki?
    Infosys or TCS?

These are the kind of questions we've answered for more than 20 years now...

However, we no longer want to just tell you which stock to buy. Instead, we want you to know about the complete stock-picking process that goes behind all our recommendations. How we analyse the business, its management, its moats...and so on. Yes, these are the secrets we've run our business on for the past 20 years. And we have revealed it all in Equitymaster's first and ONLY published book on smart investing.


At the time of writing, the Indian markets were trading marginally weak with the Sensex trading lower by 44 points or 0.2%. On the other hand, small and mid cap stocks were in favour as their representative indices were trading higher by 0.13% and 0.05% respectively. While healthcare, and consumer durables stocks were in favour today, those from the oil & gas and telecom spaces were bearing the profit of profit booking.

4:50 Today's Investing Mantra

"I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think. So I do more reading and thinking, and make less impulse decisions than most people in business. I do it because I like this kind of life" - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst) and Devanshu Sampat (Research Analyst).

Today's Premium Edition.

The Dynamics of the Dairy Industry

India is among the fastest growing dairy markets and the world's largest milk producer as well as consumer of dairy products. What is the structure of the dairy industry in India? What are the critical factors? Is it similar to FMCG Business? What do the numbers tell us about the dairy industry? Read more to find out...
Read On...Get Access

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "A Chartist's View on Sensex versus Gold". Click here!

7 Responses to "A Chartist's View on Sensex versus Gold"

sanjay joshi

May 12, 2016

please clarify the ratio sensex to mcx gold rate. say today sensex is 25754 and mcx gold rate is 29880. ratio is 0.86, has this been converted to 86? pl help.



May 12, 2016

Thanks for explaining in the more logical manner right from the year 2004. At present the ratio is 83. i.e considering gold at Rs 30000 and index at 25000. Hence when it is less than 100, one should diversify the investment to gold from equities. Is'nt it . Thanks with regards. Very scientific way of calculation rather than generalised statement to diversify the portfolio by investing in different asset classes.
RAJKUMAR S D 9323486534



May 11, 2016

Does the EM team bother to answer?


Penugonda Prabhakar

May 11, 2016

iam Penugonda Prabhakar iam studied MA,B.ed, in research will have there. some person asking i send. B.ed, distance education i studied.

Yours Lovely
Penugonda Prabhakar


Sunil aneja

May 10, 2016

I don't think it can workout for investment decisions. Still yet this ratio chart looking fine because currency INR is also on same path ,ie depreciating although gold declining internationally.

At any point of time if there is major change in USD INR this ratio chart will have different outlook

Therefore I don't think it's a valuable tool for investments decisions.



May 10, 2016

Carefully thought out, good job :)
Just few questions, as I am no expert in equity markets and need a lot of hand holding...
i. What do you mean by "price" of the Sensex?
ii. As per the chart, the ratio has always been greater than 1(well, much much above 1)implying returns from equity have beaten returns from gold. The chart shows data since Jan 2004. Have there been instances to substantiate that gold has outperformed the Sensex as you said, "At times gold will outperform the Sensex"?


Jason Dsouza

May 10, 2016

the ratio link in your charts is not showing - i mean the sensex to gold as seen in the image

Equitymaster requests your view! Post a comment on "A Chartist's View on Sensex versus Gold". Click here!
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

There are no outstanding litigations against the Company, it subsidiaries and its Directors.

For the terms and conditions for research reports click here.

Details of Associates are available here.

  1. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report.
  2. Equitymaster has financial interest in ITC.
  3. Equitymaster's investment in the subject company is as per the guidelines prescribed by the Board of Directors of the Company. The investment is however made solely for building track record of its services.
  4. Equitymaster's Associates and Research Analyst or his/her relative doesn't have any financial interest in the subject company.
  5. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
  6. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
  1. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
  2. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
  3. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  4. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  5. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
  1. The Research Analyst has not served as an officer, director or employee of the subject company.
  2. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
Definitions of Terms Used:
  1. Buy recommendation: This means that the investor could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the investor could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the investor should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
  4. Sell recommendation: This means that the investor could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.