Gold has outshined equities in 2024 with 20.5% YTD returns, while major stock indices have struggled
Over the past few years, the financial markets have witnessed a notable shift in the performance dynamics between equities and gold. As of December 24, 2024, gold has delivered impressive returns of approximately 20.5% year-to-date (YTD), significantly outpacing the SENSEX, which posted a modest 8.9% YTD return.
This divergence has prompted investors to reevaluate their portfolios, considering the potential implications for the next three years.
Gold’s Resurgence: Factors Behind the Surge
Several key factors have contributed to gold’s robust performance:
Safe-Haven Demand: Gold is traditionally viewed as a safe-haven asset, attracting investors during periods of economic uncertainty. In 2024, heightened geopolitical tensions and market volatility led to increased demand for gold as a protective investment.
Economic Factors: Rising consumer demand, particularly in regions with growing disposable incomes, has bolstered gold prices. Economic expansion in countries like India and China has led to higher surplus income, enabling consumers to invest in gold both as an asset and as jewelry.
Monetary Policy: The U.S. Federal Reserve‘s rate-cut cycle reduced the opportunity cost of holding non-interest-generating assets like gold, making it a more attractive alternative for investors seeking inflation hedges.
Policy Support: In India, changes in long-term capital gains (LTCG) taxation—from a three-year holding period to two years with a reduced tax rate—acted as a catalyst for gold demand. These policy changes lowered the overall cost of owning gold, enhancing its attractiveness as a long-term investment.
Equities Under Pressure: Challenges Faced
In contrast, equities have encountered several headwinds:
Earnings Slowdown: Many companies reported weaker-than-expected earnings, leading to a slowdown in earnings growth compared to prior years.
Inflation Concerns: Retail inflation in India surged to 6.21% in October 2024, surpassing the Reserve Bank of India’s tolerance threshold. High food prices during the festive season dampened consumer demand, affecting corporate earnings.
Currency Depreciation: The Indian rupee depreciated by about 2.4% YTD as of December 24, making Indian equities less attractive to foreign investors amid an earnings slowdown.
Profit Booking: After delivering nearly 20% returns in 2023, Indian equities saw profit-taking by institutions in 2024, exerting additional pressure on stock prices. Foreign portfolio investors sold nearly ₹3 lakh crore worth of Indian equities, contributing to the underperformance.
Geopolitical Tensions: Ongoing geopolitical instability added to market volatility, making gold a more attractive investment compared to equities.
Looking Ahead: The Next Three Years
As investors contemplate the period from 2025 to 2028, several factors could influence the relative performance of equities and gold:
Monetary Policy Trajectory: The Federal Reserve’s stance on interest rates will play a pivotal role. A dovish approach, characterized by rate cuts, could enhance gold’s appeal by lowering the opportunity cost of holding non-yielding assets. Conversely, a hawkish stance with rate hikes could bolster equities by signaling economic strength.
Geopolitical Developments: Escalating geopolitical tensions could drive investors toward safe-haven assets like gold. Stability and diplomatic resolutions, on the other hand, might restore confidence in equities.
Inflation Trends: Persistent inflationary pressures could benefit gold, traditionally seen as an inflation hedge. If inflation moderates, equities might gain favor due to improved corporate profit margins.
Economic Growth: Robust global economic growth could support equities through higher corporate earnings. Conversely, economic slowdowns might lead investors to seek refuge in gold.
Currency Movements: A weakening U.S. dollar typically boosts gold prices, as it becomes cheaper for holders of other currencies. Strength in the dollar could have the opposite effect, potentially benefiting equities.
The interplay between equities and gold is influenced by a complex array of factors, including monetary policy, geopolitical events, inflation, economic growth, and currency fluctuations. The recent outperformance of gold over equities underscores the importance of diversification in investment portfolios. As the global economic landscape evolves over the next three years, staying attuned to these dynamics will be crucial for investors seeking to optimize returns while managing risk.
