Market outlook: Gold surge may hint at equity rebound; data show rallies follow troughs

A continued rise in gold prices could pave the way for a positive phase in the Indian stock market over the next year, according to a report by JM Financial.According to the report, historical data suggests a consistent link between gold rallies and subsequent gains in Indian equities.Specifically, it found that when the Nifty/gold ratio hits a trough—a low point often following a strong run in gold—equities tend to deliver strong returns in the months ahead.“A trough in the Nifty/gold ratio is followed by positive returns in equities in the subsequent 12 months,” the report noted.JM Financial said this pattern has been seen repeatedly over the last three decades, reinforcing optimism about the near-term outlook for domestic risk assets.The report highlighted that in six out of nine previous instances, the Nifty recorded gains after the ratio touched its trough.On average, the index climbed 2.8% in one month, 15.1% in three months, 28.9% in six months, and 31.9% over a 12-month period following such lows.JM Financial’s analysis also pointed to the Reserve Bank of India’s (RBI) historical strategy of increasing the share of gold in its reserves during crises—both through fresh gold purchases and by cutting exposure to foreign exchange assets.According to news agency ANI, these adjustments have typically coincided with strong gold performance followed by a rebound in domestic equities.The firm also observed that the current gap between gold prices and the US Dollar Index appears “unsustainable.”While this might prompt some moderation in gold rates as the dollar strengthens, JM Financial believes that expectations of accelerated US rate cuts could prevent a prolonged dollar rally.With the Nifty currently valued close to one standard deviation from its long-term mean, the report concluded that the ongoing gold rally might act as a precursor to an upbeat phase for Indian equities in the coming 12 months.