Gold and equities perform differently in different situations, and that is not coincidental. One of them feeds on optimism, while the other feeds on fear. One rallies when investors are optimistic about the economy and businesses, and the other when investors are looking for safety.
Since 2000, an investment of ₹1 lakh in the Nifty 50 would be worth ~ ₹16 lakh today (3rd July). The same in gold would be ~ ₹22 lakh. Although gold’s superior performance can be credited mainly to its outperformance in recent years, equity and gold both have created wealth in the long run. But they did it in different phases, under different circumstances.
Hence, there is a need to analyse the relationship between gold and Nifty. Understanding how these two pull in opposite directions during times of uncertainty and sometimes fall in sync over time can help long-term investors build a more grounded portfolio.
Gold Responds to Volatility
During uncertain market conditions, gold plays the role of a safe investment, and its performance typically improves during uncertainty. In some crisis periods, this improvement has been significant, as seen in 2008. Its scarcity, cultural acceptance, and longstanding reputation as a store of value make it a preferred investment choice when the market is going through tough times.
Take the 2008 global financial crisis as an example. As global markets collapsed, Nifty dropped 50%+. During the same time, gold returned ~30%.
The pattern can be seen in most instances when Nifty 50 fell.
The above cases show that people view gold as a haven. When fear spreads through equity markets, investors shift to gold, and its prices increase. These instances show how vital gold is in preserving capital during real-world crises.
Gold also rises when investors expect that inflation will rise or when interest rates drop. In such scenarios, the opportunity cost of holding non-yielding assets like gold decreases, making it more attractive for long-term investors.
Nifty Responds to Economic Confidence
The equities market is cyclical, so when the panic fades, optimism returns. While gold rises during downturns, equities outperform during recoveries and stable macro periods.
For example, the formation of a new government and strong reform expectations triggered a bull market in 2014. Nifty rose as a result of steadfast investor confidence, while gold prices declined. This was because during the bull run, capital moved from defensive assets (like gold) to growth-focused equities.
Equities grow when businesses grow. As companies expand, earn more profit, and reinvest money, their stock prices go up. That’s why equities can multiply wealth over time.
Gold doesn’t produce income, pay dividends, or generate profit. It holds value and offers safety, especially in tough times. So, it protects your capital but doesn’t “work” to grow your money like a business does.
The Correlation Varies With Time
Multiple studies have analysed the Nifty/gold relationship within the Indian context. A short-term negative correlation is consistently observed. That means gold rises when equities fall and vice versa. As you can see in the table above, in four out of five instances, gold delivered positive annual returns when Nifty 50 ended the year with negative returns.
This doesn’t mean the two always move in opposite directions. Some long-term studies show a positive co-integration, meaning both asset classes may move in the same direction over time due to macroeconomic factors. In fact, since 2000, Nifty 50 and gold have moved in the same direction for 17 years.
Because of this, both of these asset classes show unpredictable behaviour during the short term. However, their long-term movement remains partially aligned under specific conditions.
Gold or Equities?
Retail investors tend to lean heavily towards equities, ignoring asset class diversification and balance. Thus, panic prevails in bear cycles, and people sell at heavy losses. Gold, on the other hand, also isn’t immune to bear cycles: between 1980 & 2000, it lost ~61% of its wealth. This means you can’t build a portfolio out of gold alone, either.
What you need is a good mix. However, data shows that adding gold to your portfolio in small proportions, ideally 20%, would give you much better risk-adjusted returns during periods of stress.
Gold is easy to invest in and can be accessed through low-cost options like Sovereign Gold Bonds or ETFs. This way, you do not have to deal with the hassle of storing physical gold, while you get all the liquidity and taxation benefits.
Conclusion
Looking closely at how Nifty and gold perform, you can better understand how market psychology works. And that, in turn, can help you position your capital with better clarity.
Correlation is only one part of long-term investing. The second part is building a portfolio that can carry you across market cycles, be they rallies, crashes, or periods of indecision. That’s why serious investing needs a calculated approach. One that blocks out the noise and filters out trends, focusing on capital protection and value growth.
Finology 30 was built on that belief. It is a curated basket of 30 well-researched stocks for long-term holding. These are selected through rigorous filters that prioritise business quality, management integrity, and valuation discipline to appreciate and protect your capital.
Finology is a SEBI-registered investment advisor firm with registration number: INA000012218.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
