Will Gold Beat Sensex to the 1-Lakh Mark?

A confession to begin with.

The inspiration behind today's title is an article that was published on the Economic Times website last week.

Now, coming back to the topic of gold and the Sensex, the yellow metal has followed in the footsteps of its stock index counterpart and touched the coveted Rs 60,000 mark recently.

Not a bad achievement for an asset class that had been written off by a lot of experts.

Gold once again proved that a long history that goes back thousands of years, does count for something after all.

Therefore, with gold back in the limelight and handily outperforming the Sensex over the last one year, the age-old debate has been reignited.

Will the yellow metal steal a march over its more fancied rival and reach Rs 1,00,000 per 10 grammes well before the Sensex hits 1-lakh?

Or with India's growth story expected to gain more momentum in the coming years, will it be the Sensex that will easily beat gold to the finishing point?

Well, we can have a more reliable prediction on when Sensex is likely to hit the 1-lakh mark as compared to gold.

You see, given where the PE multiple of the Sensex is placed, we can say that the index is more or less fairly priced right now. Thus, assuming the same multiple going forward as well, it will take around 4 years for the Sensex to touch 1-lakh if corporate earnings grow at 15% CAGR.

Bring the earnings down to say 12% CAGR and the time period goes up a tad higher to 5 years.

Therefore, it won't be a stretch to assume that Sensex can reach 1-lakh over the next 4-5 years.

But if investors turn too optimistic and assign a high PE multiple to Sensex, then the target can be attained even sooner. For the sake of conservativeness though, a time frame of 4-5 years looks like a realistic target.

Unfortunately, no such calculations can be done for gold. The yellow metal has neither earnings nor does it pay out dividends.

In fact, if you look at it from a strict value investing standpoint, gold is not even an investment.

It is a speculative asset at best as it does not have an intrinsic value of its own and the seller has to rely upon what the buyer is willing to pay for it, in order to make his profits.

However, there is no denying gold's rock-solid image as a preserver of purchasing power and arguably, its standing as the best insurance out there against the rapid devaluation and debasement of currencies.

In India however, it has done much more than merely keep up with inflation. In fact, it has given a solid competition to the benchmark index in terms of providing superior long-term returns.

A basic google search tells me that the Sensex is up 0%, 12% and 12% over the last 1-year, 5-year and 10-year period respectively.

On the other hand, a gold ETF share price, which can be considered a good proxy for the gold price is up 14%, 13% and 6% respectively, for the same three time periods.

Thus, gold has outperformed the Sensex over a 1-year and a 5-year time period whereas the Sensex has done much better than the yellow metal over a 10-year period.

Now, is this enough evidence to conclude that one should prefer gold over a short-term holding period of say 1-5 years and opt for Sensex if the holding period is more than 10 years?

Well, not so fast.

You see, one of the big reasons Sensex has outperformed gold over a 10-year period is because of the former's starting valuations. Sensex was trading at a PE of around 17x back in March 2013, which is lower than its long term average of 19x-20x. This means that Sensex was attractively valued, thus contributing in a big way to its outperformance vis-a-vis gold.

Five years ago, Sensex was at a PE of around 23x, meaning it was slightly overvalued. And this perhaps explains why gold outperformed Sensex marginally over a 5-year period.

Let's take another data point. In March 2019, Sensex was quite expensive and was trading at a PE of more than 28x its trailing twelve month earnings. It has returned an 11% CAGR since then.

And how has gold done? Well, it has outperformed the Sensex comfortably by earning a CAGR of 16%.

Therefore, it looks like when you buy Sensex at expensive valuations i.e. at a PE of more than 24x-25x, gold can give Sensex a run for its money.

However, if you invest in Sensex at attractive valuations i.e. PE of less than 20x, it is the Sensex that has an edge over the long term.

To be honest though, it doesn't have to be an either/or situation with Sensex and gold. In fact, one can take advantage of this tendency of gold to give better returns than Sensex if the latter is bought at expensive valuations and vice versa.

So, if I were you, here's what I would do. I would take maybe 10% exposure to gold when the markets seem attractively valued or are not prohibitively expensive. But once they turn expensive, I would increase the allocation to gold to say 30%-40%.

This way, you are playing the odds and putting yourself in a better position to outperform both gold as well as Sensex over the long term.

Of course, there are people out there who don't believe in toggling this way between Sensex and gold and are perfectly happy having only a small allocation to gold as a hedge against an economic disaster of any kind.

And this is perfectly fine in my view. But if you must take a calculated risk and intend to earn market beating long term returns, the strategy I just highlighted can be the way to go.

Therefore, in conclusion, it doesn't matter whether gold or the Sensex reaches the 1-lakh mark first. To be honest, making a prediction of this kind is beyond anyone.

What is within one's reach however is capitalising on the upward journey of both these asset classes towards the coveted mark. And this should be grabbed with both hands in my view.

Happy Investing.

Warm regards,


Rahul Shah
Editor and Research Analyst, Profit Hunter