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Sensex versus Gold in Fairly Valued Zone
Aug 27, 2019


There is one particular ratio we like to go back to whenever both gold and equities tend to vie for investor attention. As is the case now.

The Sensex to Gold (per 10 gm) ratio going back 15 years throws up some interesting information.

While the ratio has been quite volatile, the average ratio turns out to be 1.

In other words, whenever the Sensex has risen at a much faster pace than gold prices, its fall has also been equally precipitous. The reason behind this volatility is not hard to find.

Stock markets are more amenable to manipulation than gold prices are.

Money printing or an increase in money supply can give the impression an economy is growing.

But you cannot manipulate the supply of gold. Hence, it tends to show far more stability in its price.

Thus, if the Sensex to gold price ratio is way more than one, it could be a signal the Sensex is overvalued.

Alternatively, if it is way below one, it could mean that Sensex is undervalued.

The ratio stands at around 1.09 currently, indicating that the Sensex is trading pretty close to its fair value!

Thus, even though the market correction seems overdone in mid and smallcaps, the bluechips, particularly those in the Sensex, aren't undervalued yet.

Data Source: Ace Equity

This Chart Of The Day was published in The 5 Minute WrapUp - Concor Has 33% Upside from India's 10% Gain in the US-China Trade War

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