Monday marked the beginning of a new financial year and Day 1 brought gains aplenty for two investment instruments that seldom move in tandem: stocks and gold.

Benchmark indices BSE Sensex and Nifty 50 scaled fresh peaks, hitting all-time highs of 74,254.62 and 22,529.95, respectively, in intra-day trading. Adding to this sheen was the price of gold, which too hit a record on Monday.

Domestic gold futures rose to Rs 69,487 per 10 grams, up nearly 10% so far in 2024. Indian gold futures tracked gains in overseas markets, where prices hit all-time highs. Gold futures are future-based contracts for the commodity with a predetermined price. Here, actual gold does not change hands but contracts are traded based on market speculation of what the price of the metal will be in the future.

Now, this is a peculiar phenomenon as, generally, surges in the two do not go hand in hand: a rally in stock markets is accompanied by a cooling down of gold prices and vice versa. Let us understand why and how it’s different this time.

Why gold and stock prices don’t usually sync: In simple terms, equities are classified as high-risk assets while bullion is considered a safe haven. Bonds are fixed-income instruments that give lower returns than equities, but are considered safer. However, they are subject to expectations of a stable government.

In times of economic or political uncertainty, wars and disasters, people generally flock to assets that offer stability. The value of equities and currencies can see extreme swings in such scenarios. Confidence in bonds can take a hit amid internal turmoil. Gold, however, shines bright in these circumstances.

One reason is that gold’s value is intrinsic, not determined. The precious metal is rare and valuable on its own irrespective of the turn of events. It is also tangible and universally recognized. Its prices have remained resilient and have steadily risen during times of crises compared to other precious metals. Hence it is considered a hedge against inflation and geopolitical risks.

So, while stocks can give high returns, gold promises guaranteed returns. Ideally, when market sentiment is bullish, investors would rather invest in equities that give better returns than gold. However, this would be reversed when markets expect any instability.

What happened this time: Analysts believe that gold prices, both in India and internationally, primarily rose owing to expectations that the US Federal Reserve may cut interest rates in June.

How are Fed rates and gold related, you ask? Let’s take a further step back: when do central banks raise interest rates?

The job of central banks is to keep the economy running and intervene to moderate upswings and downsides. So rates are raised when there is excess liquidity or inflation is rising—to increase the cost of borrowing. At its meetings, the Federal Open Market Committee sets a range for the federal funds rate, which determines the interest rates commercial banks charge each other for overnight loans. Data on Friday showed that the Fed’s preferred gauge for inflation—the US personal consumption expenditures index—eased in February, which adds to expectations that the Fed may cut rates to reduce borrowing costs.

Traditionally, when rates rise, investors want to move to trading instruments that offer higher returns to manage this higher cost of borrowing. Even fixed-income assets like bonds offer higher yields that become more alluring than gold.

At the same time, it is believed that when interest rates are lowered, returns from assets such as bonds and savings also decrease, making the non-yielding gold more appealing. It reflects reduced opportunity cost of holding the yellow metal. Additionally, interest rates also weaken the dollar, which is the currency in which gold is priced. For holders of other currencies, a weaker dollar indicates they can now buy the same gold at a slightly lower price, raising demand.

But be cautioned that the inverse relationship between interest rates and gold prices is not as simple and various other factors also play a role. Importantly, data from the US Geological Survey shows that the correlation between gold and interest rates over the past 50 years, since 1970, is about 28%—not considered significant.

So, coming to the other factors that are pushing up gold prices: High demand, boosted by the wedding season in India and buying by central banks, especially in China, and geopolitical instability in the Middle East and Ukraine.

According to Bloomberg, China’s central bank has substantially increased reserves of gold, boosting its holdings since the past 16 months. Buying gold has also become popular among the young Chinese population.

While gold demand has been strong in India owing to the upcoming wedding season, a Reuters report citing gold dealers suggests that March may see the lowest gold imports owing to the surge in prices, which has prompted many to exchange old gold jewellery for new.

Stock markets, meanwhile, seem to have recovered from the minor correction after SEBI’s warning on the froth in small- and mid-cap stocks.

Adding to the optimism in the Indian markets are expectations that the Fed will cut interest rates. Apart from boosting gold prices, rate cuts are also a positive for equity markets as lower interest rates mean cheaper cost of borrowing for businesses, which can translate to inflows into stocks. With the current exuberance in D-Street and the Indian economy’s outlook looking bright, expectations are that rate cuts will boost foreign inflows into Indian markets. Additionally, a European Central Bank official’s comments suggesting possible rate cuts in Europe have also lifted market sentiment.

Other cues such as positive Chinese PMI data and expectations that the RBI will maintain status quo in its upcoming monetary policy committee meeting also kept markets upbeat. Importantly, markets are buoyant in expectation of the upcoming general elections not disturbing the political stability—returning Prime Minister Narendra Modi’s BJP to a third term in power.