Benchmark Sensex, that hit historic mark of of 50,000 today, has delivered better returns than the gold, on the back of roll-out of vaccines globally, normalisation of business operations and the monetary and fiscal support from the government.
Sensex surged almost 95.7% to the lifetime of 50,184 today from lows of 25,638 points in March 2020, when India announced Covid-19 lockdown. Gold prices, on the other hand, rose 36% from Rs 41,226 per 10 gm hit on March 23, 2020 to the lifetime high of Rs 56,191 per 10 gm on August 7, 2020.
In the first month of 2021, while gold price has been consolidating near 50K, Sensex has risen 4.6%
Additionally, over the past 15 years, Sensex has outshined gold. Since April 2005 till today, Sensex has given 7.5 times returns when compared to gold, that appreciated 7.1 times.
Gold and Sensex have seen a strong rise in 2020, giving high returns to investors amid Covid-19 uncertainty. However, gold outperformed equities when compared on year-on-year basis. Gold was the best performing asset class of the year 2019-2020, delivering a return of around 28% compared to 15% by the S&P Sensex.
Sensex rose 15% from 41,253 registered on December 31, 2019, to 47,780, recorded on December 31, 2020. The bullion, on the other hand, has risen by 28% in the same period (from Rs 39,000 to Rs 50,151).
Equity as well as the commodity market participants are eagerly following the news of covid mutations as well as vaccine development. Both market's barometers rose in tandem with each other last year and touched record highs multiple times.
Considered a safe haven in turbulent times, investors' interest in gold has resurged ever since central banks globally embarked on a unprecedented financial stimulus to combat the Covid-19 pandemic related economic headwinds. Excess liquidity led to the depreciation of the US dollar and supported the rally in gold.
Even before the pandemic, geopolitical issues such as the US-China trade war, low-interest rates and ultra-loose monetary policy had begun to gradually lift gold prices, denting hopes of a swift economic recovery. After the global lockdowns, the gloomy outlook for the world economy sparked another rush towards the yellow metal.
Although, now gold trades almost Rs 6,000 lower than its lifetime high, amid high money rotation from gold to risky assets like equity in the last few months. The slump in global rates of the bullion metal back from the psychological level of 50K in the Indian commodity market was due to Covid-19 vaccine news that impacted prices since mid-November. With gold rates now off from all-time highs, value of gold will see further fall amid rounds of fresh stimulus measures and rising US dollar.
Prof Arvind Sahay, Chairperson, India Gold Policy Centre at IIM Ahmedabad said, "Gold prices in top 17 consuming countries are higher by 22% on average, varying between 13% to 60%. We think gold prices still have scope to increase by 20 to 25% in 2021-22 in a certain scenario. In this scenario, interest rates in the dollar and Euro zones continue to remain soft, trade frictions continue to simmer between the US and EU on one side and China on the other, geopolitical tensions and technological rivalry over semiconductors ratchets up a notch or two, Covid -19 cases continue to rise and the vaccine does not perform as well as expected for another 6-12 months, new stimuli get announced and bitcoin gets even more volatile."
He added, "As a new 'normal' is yet to be established in the financial markets (what will be the "new" benchmark for PE ratios on the Dow, Footsie, Dax, NSE and HangSeng?, What will be the scale of money flows between markets of the $10 trillion fiat money that has been released), there could be some systemic risks looming, which may provide support for higher prices for gold. If on the other hand, if the above-stated uncertainties mitigate and come down substantially, then one may see gold prices as being essentially flat for the next 6-12 months."
Analysts suggest a similar trend for equity markets as well, with domestic indices taking cues from the worldwide trend.
On May 23, 2019, the index touched 40K mark, when PM Modi won the elections by a landslide victory. After coronavirus pandemic brought the benchmark indices to multiyear lows in March-end, the journey to 40K to 50K in only 415 sessions, has been sparked by strong FIIs inflows and buoyant global markets on prospects of Joe Biden's win in US polls. This was the shortest period index took to cover 10,000 points to 50K since its inception. Positive FII inflows, reopening of the global economy, resumption of business activities have also kept equity investors hooked to the market during the first month of 2021, with indices hitting new highs every day. According to experts, prevailing uncertain market conditions amid the rising cases of the virus and vaccine development will keep markets at high volatility on a global scale.
Investor sentiments also turned optimistic amid the start of Q3 earnings season with a decent show in results, indicating significant financial growth since the damage last quarter due to the impact of coronavirus outbreak and worldwide lockdowns.
World markets are flushed with liquidity amid Covid-19 stimulus and lower lending rate by central banks. This has led to an unprecedented rise in both global and domestic equities, increasing the disconnect between the market and the economy. The world economy continues to face downward pressures from the sustained spread of coronavirus and will take some time to recover.
At such overbought positions, both equity and commodity market are vulnerable to correction. Analysts have also speculated the Covid-19 led crisis to last longer, further deteriorating confidence in a quick economic recovery due to lacklustre investment and consumption. With Sensex heading above the key psychological mark of 50,000, analysts expect the market to change trend soon. Amid high valuations, partial profit booking can be considered, especially ahead of budget 2021.