The two most popular investment options have always been gold and stocks. Coincidentally, the BSE Sensex and gold both breached the Rs 85,000 barrier in September 2024 and February 2025, respectively. Now, we have the chance to examine both in the long run, so let's take use of this exceptional opportunity.
Why Is Gold Having Such Success?
With record highs nearly every day, gold has been on an amazing rally. In early 2025, it has already produced returns of around 10% after rising 13% in 2023 and 27% in 2024. What is causing this spike, then?
When there has been increased inflation, political unpredictability, or market volatility, gold has historically performed exceptionally well. Indeed, there have been plenty of those three in recent years: increased inflation, wars, and trade disputes. Therefore, it should come as no surprise that people have started using gold as an insurance tool.
However, here’s the twist. Gold has normally acted as an inflation hedge, but recent events have muddled that narrative. Inflation in the United States had risen as high as 9.1% back in June 2022, but gold prices only accelerated significantly after inflation had slowed. What’s happening here?
Interest rates and geopolitics' roles
The US Federal Reserve first downgraded inflation as "transitory" after it had increased significantly after COVID, delaying tightening monetary policy by hiking interest rates until March 2022. Markets anticipated that inflation would drop as soon as the Fed started raising rates significantly, and gold prices started to rise in February 2024 when rate reduction started.
The spike in gold prices was also greatly influenced by geopolitical reasons. Market uncertainty has been exacerbated by the conflicts in Taiwan and China, Israel and Hamas, and Ukraine. The ideal combination for skyrocketing gold prices is Donald Trump's return to the White House and his threats of new trade battles.
Gold vs. Sensex: A 20 Year Growth Analysis
Back in 2005, the BSE Sensex was around 8,000, while gold traded at roughly Rs 7,000 per 10 grams. Fast forward 20 years, and both have crossed Rs 85,000. Despite a four-month gap between their milestones, their long-term growth has been strikingly similar.
When analyzed over Compound Annual Growth Rate (CAGR), both gold and Sensex have delivered an annual return of close to 12-13 over the last two decades. What an interesting coincidence, you must say. But there exists an underlying factor that people tend to overlook.
The Rupee Effect: Why Gold Appears to Outshine
Gold prices are quoted in terms of U.S. dollars, while the Indian rupee has lost ground against the dollar over time. The currency devaluation has contributed an incremental return of 2-3% per annum if returns are calculated in terms of the rupee. In terms of dollars, gold’s return over the last 20 years has been nearer 10%.
Key Takeaways for Investors
Gold and stocks perform different roles in an investment portfolio. Equities offer increased long-term growth, whereas gold offers stability during downturns. A diversified portfolio, based on past performance, has both, so it hedges risks while generating steady returns.
At the end of the day, the best option isn't gold vs. stocks—it's both, but in the right balance, as part of an intelligent asset allocation.
Disclaimer: The information provided in this blog is for educational and informational purposes only. It does not constitute legal, financial, or professional advice.
