Macro Analysis
The Historical Lens: Benchmarking Equities and Commodities Against Gold
How decades of mean reversion data inform disciplined asset allocation today.
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The 100% Move: Why We Must Audit the Ratios
Gold prices have surged nearly 100% in a remarkably short period. When the world's oldest numeraire doubles, it changes the denominator for every other investment. This magnitude of movement necessitates a complete re-evaluation of relative value: Have other asset classes kept pace, or has a massive dislocation opened up?
The Mean Reversion Guide
To navigate this, we rely on a simple but powerful tool: Mean Reversion. Think of asset relationships like a rubber band. When the ratio of one asset to another stretches too far from its historical average, the tension builds, and eventually, it snaps back.
History serves as our map. By investigating decades of ratio charts (Asset Price ÷ Gold Price), we can strip away the noise of nominal currency prices and see which assets are truly cheap in real terms.
But... Is This Time Different?
"What about Fiat Debasement?"
There is a valid counter-argument: unprecedented central bank buying and large-scale currency debasement might mean gold should trade at a permanent premium. To address this, later in this report, we will look at the equity markets of Argentina and Turkey—economies that faced total currency collapse—to understand how equities perform against gold in worst-case scenarios.
Ultimately, the goal of this analysis is to build a template—a disciplined rule of thumb—that allows the investor to allocate capital based on structural value rather than fleeting sentiment.
To identify statistical extremes where risk is low and reward is high.
Benchmarking the Nifty, Sensex, Crude Oil, and Copper against the price of Gold over 30-40 year cycles.
Indian Stock Market vs. Gold
A comprehensive look at Indian indices denominated in Gold (INR). Are valuations stretched or compressed in real terms?
Sensex / Gold
Current: 174.3Nifty 50 / Gold
Current: 5.37Nifty 500 / Gold
Current: 48.83Nifty Smallcap 100 / Gold
Current: 35.63The Constant Amidst Chaos
Before isolating specific entry points, the charts above reveal a fundamental truth: Mean Reversion is stronger than Macro Shocks. Over the last 35 years, India has faced the 1991 Balance of Payments crisis, the 2008 Global Meltdown, and the 2013 Currency Crisis. Throughout this period, the INR has depreciated significantly, and the nominal price of Gold has surged. Yet, as the charts demonstrate, the Equity-to-Gold ratio has remained range-bound. This stationarity implies that extreme undervaluations are not permanent; they are springboards for reversion.
The Structural Floor (Nifty Smallcap 100)
To advance this analysis, we isolate the Nifty Smallcap 100. As the most volatile and economy-linked component of the equity market, this index amplifies the signal. The ratio of Smallcaps to Gold has returned to a structural support zone that has marked the absolute best buying opportunities of the last two decades. We filter for post-2000 data to capture the modern economic era.
The Asymmetry of Returns
- Consistent Outperformance: In every single instance recorded, equities significantly outperformed Gold. The "safety" of Gold proved expensive, while the "risk" of equities was handsomely rewarded.
- The Smallcap Multiplier: Nifty Smallcap 100 was consistently the best-performing asset class, averaging CAGRs between 25% and 30%. This level of compounding implies that capital more than doubled in the subsequent three years.
- Macro Immunity: No macroeconomic headwind—domestic or global—was able to break this trend. Special attention must be paid to the COVID-19 crisis: even when the world literally came to a standstill and companies were shut down, the ratio still worked. The structural valuation floor held, proving that mean reversion is a force stronger than even the most severe economic stoppages.
The Verdict: Time to Rotate
The ratio of Smallcap stocks to Gold has dropped back to levels last seen during periods of market stress, specifically the 2020 pandemic. Historically, such a low ratio suggests the market is pricing in a severe economic event. Data from the last twenty years indicates that when valuations reach this point, equities have historically performed better than gold in the period that follows.
Investor Toolkit: A Simple Rule
"You can always track this asset allocation yourself without complex models. The rule is simple: When the Smallcap/Gold Ratio hits ~30 (as it has today), the reward for risk is at its maximum. When the ratio expands to 70-80, the easy money has been made, and it is time to rotate back to safety."
Commodities vs. Gold
Are real assets cheap or is gold expensive? The deflationary signal from the commodity complex.
Crude Oil / Gold
Current: 12.43Copper / Gold
Current: 1.17The Structure of Real Assets
To understand the signal, we must first understand the composition. The bulk of any major commodity index is driven by three pillars: Energy (Oil), Industrial Metals (Copper), and Bullion. By benchmarking Oil and Copper against Gold, we are effectively measuring the "productive economy" against the "monetary store of value."
A Feature, Not a Bug
You will notice that these charts are less precisely "mean reverting" than the equity charts in Section 1. This is expected. Equities compound earnings; commodities cycle around scarcity and replacement cost.
The behavior of commodities is characterized by long periods of dormant consolidation—often lasting a decade or more—followed by explosive, condensed periods of outperformance. We are currently deep in one of those long consolidation phases. The charts generally show flatlining bottoms rather than V-shaped recoveries, testing the patience of the investor before rewarding them.
The ratio at 12.43 sits in a historical "Deep Value Zone." Energy is the most volatile component of the complex. This low level suggests that the market has priced in a scenario where energy demand collapses relative to the monetary base. Historically, these zones precede violent snap-backs.
Copper is the proxy for global industrial activity. At 1.17, the ratio mirrors the depths of the 2008 Financial Crisis. It signals that capital has aggressively fled productive assets for safety.
If we view the current consolidation as a precursor to the standard commodity cycle, real assets are currently offering an asymmetric entry point. The risk is time (waiting for the cycle to turn), but the valuation risk is minimal compared to gold.
Hyperinflation Case Studies: Argentina & Turkey
Evaluating equity market performance against Gold in extreme hyperinflationary scenarios where local currency has become virtually worthless.
Case Study: Turkey (Lira Collapse)
USD / TRY
Curr: 43.49Gold (in TRY)
Curr: 211,603BIST 100 Index / Gold
Turkish Equities denominated in Real Money (Gold)
Case Study: Argentina (Peso Collapse)
USD / ARS
Curr: 1,447.00Gold (in ARS)
Curr: ~7.04MMerval Index / Gold
Argentine Equities denominated in Real Money (Gold)
Inference: The Equity Shield in Hyperinflation
The charts for USD/TRY and Gold/TRY (and their Argentine counterparts) visualize total monetary collapse. In Turkey, Gold prices in Lira have surged from ~1.15 TRY in 1991 to over 211,000 TRY today—a staggering nominal increase of roughly 18.5 million percent. In Argentina, the USD/ARS peg of 1:1 in the 90s has exploded to 1,447:1. In these scenarios, cash is not a safe haven; it is a guaranteed liability.
Conventional wisdom suggests that equities—which rely on economic stability—should collapse during hyperinflation. However, the data proves otherwise. Equities are claims on real assets: factories, land, inventory, and future cash flows that re-price in the inflated currency. While holding cash guarantees a 99% loss of purchasing power, holding the index ensures participation in the nominal repricing of the economy.
The highlighted charts (BIST 100/Gold and Merval/Gold) reveal the most critical insight: Survival. Even in the face of currency evaporation, the ratio of Equities to Gold has not collapsed to zero.
In Argentina, the Merval/Gold ratio today (~454) is roughly in line with levels seen in 2002-2003, suggesting that despite decades of economic chaos, operating companies have retained their value relative to hard money. In Turkey, while the ratio has compressed, it remains within a functional cyclical range. This demonstrates that equities function as a "pass-through" mechanism for inflation, allowing investors to maintain their relative wealth against Gold even amidst massive macroeconomic shocks.
Final Synthesis
The Final Verdict: Allocate to Value, Not Fear
We have traversed 35 years of financial history, crossing stable growth periods in India and total currency collapses in Turkey and Argentina. When we strip away the noise of nominal pricing and denominate the world in Gold, a clear strategic roadmap emerges for the disciplined allocator.
The Aggressive Rotation
The Nifty Smallcap/Gold ratio is at a structural floor (~35), mirroring the valuations seen during the 2008 Crisis and the COVID-19 crash.
Inference: The market is pricing in a disaster that has not happened. Rotating from Gold (structurally expensive) into Smallcaps (structurally cheap) offers the highest probability of asymmetric returns.
The Real Asset Floor
Oil and Copper are trading at deep discounts relative to Gold. This reflects a period of consolidation typical of commodity super-cycles.
Inference: Productive assets are cheap relative to monetary assets. If the global economy avoids a depression, the reversion trade in energy and metals provides a powerful hedge against the "crowded" safety trade in bullion.
The Ultimate Safety Net
Data from Turkey and Argentina proves that even in the worst-case scenario (hyperinflation), equities do not go to zero against gold. They re-price.
Inference: Fear of currency debasement should not drive you out of equities. Owning productive companies is a proven shield against the death of a currency. Cash is the only guaranteed loss.
The ratios suggest we are at a pivotal turning point. The easy money in Gold has been made. The hard money is now waiting in the discounted assets—Smallcaps, Energy, and Industrials—that the market has left behind.