What is the Nifty-Gold ratio signalling now? Could a new bull run in Indian equities be next?

One of the most closely watched long-term market indicators is flashing a signal that Indian equities may be trading at attractive valuations relative to gold.

The Nifty 50-gold ratio has narrowed further to 1.70, suggesting the stock market is oversold and equities are deeply undervalued compared with gold. The ratio, calculated by dividing the Nifty 50 index by the price of one gram of gold in India, serves as a long-term gauge of relative valuations between financial assets and safe-haven investments.

When the ratio is elevated, equities are considered expensive relative to gold. Conversely, when it falls to lower levels, stocks are viewed as being available at bargain valuations compared with the precious metal.

Historically, a ratio above 4 has indicated that equities have run significantly ahead of gold, while readings below 2 suggest gold has materially outperformed stocks. Although movements in both asset classes are influenced by factors such as inflation, interest rates, government policies and geopolitical developments, the ratio has often provided useful clues about their future direction. It also helps investors assess whether they should increase or reduce their allocation towards equities and gold.

The indicator has gained renewed attention as market volatility intensifies. While geopolitical tensions usually boost demand for safe-haven assets such as gold, the current macroeconomic backdrop is being shaped by another key factor. Rising crude oil prices are fuelling expectations that the US Federal Reserve and other major central banks could tighten monetary policy further to contain inflationary pressures.

On Tuesday, the Nifty 50 declined more than 1% during the session, even as the Sensex traded higher. The divergence followed the Securities and Exchange Board of India's (SEBI) decision to introduce a new auction-based mechanism aimed at making the price discovery process more transparent.

Meanwhile, MCX gold traded 0.43% higher at ₹143,620 per 10 grams on August 4.

Should you buy equities or gold?

According to Aamir Makda, Commodity & Currency Analyst at Choice Broking, the ratio has recovered from recent lows, indicating a shift in investor sentiment.

"Nifty/Gold ratio has rebounded from the recent support low of 1.55. Currently, the ratio is at around 1.70. This ratio is a macro inter-market indicator which can be used to gauge relative valuation and shifting risk appetite between Equities and Gold. The recent rise in ratio from dips suggests that Equities are outperforming Gold and investors are in a risk-on mindset, favouring economic expansion over safe-haven assets."

Makda added that equities remain historically inexpensive relative to gold and noted that major declines in the ratio to the 1.5-2 range have historically preceded strong multi-year equity bull runs.

For investors evaluating portfolio allocation, he believes a rebound in the Nifty-Gold ratio from below 2.0 serves as an important signal to reassess capital deployment. As the ratio climbs from historical lows, it indicates equities are beginning to regain momentum over safe-haven assets, suggesting investors could consider increasing equity exposure or booking profits in gold. However, he advised waiting for confirmation through a sustained move above the 2.2-2.5 range, accompanied by broad market participation and meaningful institutional inflows, before concluding that a new equity bull market has begun.

Meanwhile, Antu Eapen Thomas, Senior Research Analyst, Geojit Investments noted, "The Nifty 500-to-gold ratio currently stands at ~1.9x, well below its long-term median of ~2.6x, indicating that equities remain relatively attractive compared to gold. Historically, such levels have coincided with periods of favourable long-term equity returns. While gold continues to serve as an important portfolio diversifier, improving earnings visibility and easing geopolitical uncertainties support a gradual increase in equity allocations."

Key support and resistance levels to watch

Jigar S Patel, Senior Manager – Technical Research Analyst at Anand Rathi Share and Stock Brokers Limited, believes the ratio is currently hovering near an important long-term support zone.

"The Gold vs Nifty Ratio is currently trading near 0.15, which coincides with a major long-term support zone. Historically, this level has acted as a strong base, indicating that equities and gold are relatively balanced in terms of valuation. On the upside, 0.20 remains the key resistance, where previous rallies in the ratio have faced selling pressure."

Patel said that as long as the ratio remains between 0.15 and 0.20, it is likely to stay range-bound, indicating that neither equities nor gold currently enjoys a decisive relative advantage. In such a scenario, investors may continue maintaining a balanced allocation between the two asset classes.

He further explained that a sustained move above 0.20 would favour equities over gold, whereas a break below 0.15 could indicate renewed outperformance by gold and point to a more defensive market environment.

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.