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A rally in gold prices could be setting the stage for a positive phase in Indian equities over the next 12 months, according to a report by JM Financial.
The report stated this based on an analysis of the historical relationship between the Nifty and gold, which shows that a trough in the Nifty/gold ratio which often occurs after a strong run in gold has consistently been followed by healthy gains in the equity market. It stated, "A trough in the Nifty/gold ratio is followed by positive returns in equities in the subsequent 12 months." The report stated that this pattern, observed repeatedly over the past three decades, suggests that the current gold rally could once again precede a strong performance by domestic risk assets. According to JM Financial, in 6 out of 9 such instances in the past, the Nifty posted gains in the month after the ratio hit its trough. On average, the benchmark index rose 2.8 per cent in the following month, while its gains expanded to 15.1 per cent in three months, 28.9 per cent in six months, and 31.9 per cent in 12 months post the trough. This historical correlation, the report noted, paints an optimistic picture for equities in the near term. The analysis also pointed out that the Reserve Bank of India (RBI) has, in earlier crises, increased the share of gold in total reserves, not only by purchasing more gold but also by reducing its exposure to foreign exchange assets to shield the economy from external shocks. This move has often coincided with periods of strong gold performance followed by a recovery in domestic equities. It further observed that the current divergence between gold and the US Dollar Index is at unsustainable levels, and based on past trends, this could lead to a moderation in gold prices as the dollar strengthens. However, the firm believed that expectations of an accelerated rate cut cycle in the US do not support a sustained strengthening of the dollar. With the Nifty currently trading at valuations close to one standard deviation from its long-term mean, the report findings suggest that the recent rally in gold could serve as a precursor to a favourable phase for Indian equities over the coming year. (ANI)
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