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TABLE OF CONTENTS
Chapter 1 : Introduction…………………………………………………….……………..1
1.1 Objective of the study …………………………………….…………......................... 4
1.2 Research Methodology .……………………………………………………...…….....4
1.3 Limitations …………….……………………………………………….………..……4
Chapter 2 : Literature Review…………………………………………………….……....5
2.1 Capital Markets .………………….………………………………………..………....6
2.1.1 Scenario of Indian Capital Markets (2010-2011) ……………………………....8
2.1.2 BSE Sensex………………………………………………………………….....10
2.1.3 Dow Jones Industrial Average …………………………………………….......11
2.1.4 FTSE 100 Index..................................................................................................12
2.1.5 NIKKEI 225........................................................................................................13
2.2 Gold ............................................................................................................................16
2.2.1 Gold as an investment ........................................................................................16
2.2.2 Evolution of Gold in Global Economy ..............................................................18
2.2.3 Gold in India ......................................................................................................22
2.3 Gold Prices and Stock Market Indices ........................................................................26
Chapter 3 : Research Methods and Procedure…………………………….……………..30
Chapter 4 : Findings and Data Analysis ………………………………………………...34
4.1 Stock Indices and Gold Price……………………………………………………35
4.2 Correlation between Indices and Gold price…………………………………….40
4.3 Monthly Returns in Stock Indices and Gold price……………………………....45
4.4 Correlation between monthly returns of Indices and Gold price ……………….49
4.5 Annual returns on Stock and Gold………………………………………………54
4.6 Annualized volatility of Stock and Gold ……………………………………….55
Chapter 5 : Conclusion ………………………………………………………………….56
BIBLIOGRAPHY.............................................................................................................58
LIST OF TABLES
S. No. Table Name Page No.
1. Data selection criteria 33
2. Descriptive Statistics of Indices 35
3. Stock Indices Movement 37
4. Descriptive Statistics of Gold 38
5. Gold Price Movement 39
6. Stock Index and Gold 40
7. Descriptive statistics of Stock Index Monthly Returns 45
8. Stock Monthly Returns 46
9. Descriptive statistics Gold Price Monthly Returns 47
10. Gold Monthly Returns 48
11. Stock Returns and Gold Returns 49
12. Annual Returns on Stock and Gold 54
13. Annualized Volatility of Stock and Gold 55
LIST OF FIGURES
S. No. Figure Name Page No.
1 BSE Index chart 14
2 DJIA Index chart 14
3 FTSE 100 Index chart 15
4 NIKKEI 225 Index chart 15
5 Gold Price (INR) 24
6 Gold Price (USD) 24
7 Gold Price (GBP) 25
8 Gold Price (JPY) 25
9 Market timings 32
10 Stock Indices Box Plot 36
11 Gold Price Box Plot 38
12 DJIA Trend Lines 41
13 Gold (USD) Trend Lines 41
14 BSE Trend Lines 42
15 Gold (INR) Trend Lines 42
16 FTSE 100 Trend Lines 43
17 Gold (GBP) Trend Lines 43
18 NIKKEI Trend Lines 44
19 Gold (JPY) Trend Lines 44
20 Stock volatility box plot 45
21 Gold price volatility box plot 47
22 DJIA Volatility Trend Line 50
23 Gold (USD) Volatility Trend 50
24 BSE Volatility Trend Line 51
25 Gold (INR) Volatility Trend 51
26 FTSE 100 Volatility Trend Line 52
27 Gold (GBP) Volatility Trend 52
28 NIKKEI Volatility Trend Line 53
29 Gold (JPY) Volatility Trend 53
1
Chapter 1:
INTRODUCTION
2
INTRODUCTION
The study of the stock market of a country in terms of a wide range of macro-
economic and financial variables has been the subject matter of many researches since
last few decades. Empirical studies reveal that once financial deregulation takes place, the
stock markets of a country become more sensitive to both domestic and external factors
and one such factor is the gold. From 1900 to 1971, with the global systems of gold
standard and USD standard, gold price was regulated. But, since 1972, gold has been
disconnected from the USD. Particularly in 1976 when the International Monetary Fund
(IMF) passed Jamaica Agreement, did gold begin to evolve from currency to ordinary
merchandise and since then gold price has been determined by market supply and
demand. The volatility of the market is influenced by many factors. Gold is one of them.
Similarly the volatility of the stock market has a significant impact on the gold market. A
higher volatility in the stock market results higher investment in the gold market, as gold
is considered as a secure investment. This is because, gold is not affected by the
fluctuation in market fundamentals and it is used as a hedging instrument for risk
minimization.
In India, the government started the process of globalization and liberalization
since 1991 which allowed prices to be determined by the market forces. Since then, the
government has been taking a number of steps to reform the gold sector and ensure that
India benefits from the demand-influence that it has on the gold business internationally.
The liberalization of the gold sector has been made in stages; first allowing a number of
banks to import gold – braking the monopoly of the State Trading Corporations; then
considerably reducing the import duty – destroying a lucrative parallel smuggling
channel and now, allowing traders, manufacturers as well as investors to trade in gold
futures in India itself. Thus the gold market after deregulation exhibited more volatility
and there is subsequent increase in the price and investment pattern of gold market.
Though the volatility of gold market increased, but still it is considered as one of the
safest venture of investment. In India it is the second most preferred investment venture
after stock market. For this reason, investors prefer to invest in gold market, when the
3
stock market is very volatile. The globalization policy of government has opened up the
economy and deregulated the markets. But these market deregulations, structural reforms
in global trade and technological development has revolutionized the financial market. A
by- product of this revolution is increased volatility of the market.
Gold prices have been on an uptick since 2000, while the stock market declined
from 2000 to 2003 and then again in 2008. Through the recovery phase that commenced
in 2003, gold prices kept rising. However in 2008 when the market was suffering from
bearish phase worldwide, gold prices spiked as panic spread across global markets. Since
May 2009 when signs of recovery in the stock markets globally started emerging, gold
continued to forge ahead, albeit at a slower pace. In terms of returns there is clearly a
concrete case for including gold in one’s portfolio. The returns over the long term have
been high unlike the other safe debt instruments which are low yielding (compared with
equity). Over 10 years, gold has clearly done better than Sensex. While over the much
shorter one-year period the equation changes drastically. Over the one-year period after
2008 recession, the Sensex had delivered an impressive return of 25.5%, as against 16%
returned by gold. The characteristic difference between equity and gold is that the pace at
which one gains and loses money in case of equity is extremely high. The movement
from an average value in case of gold is not as drastic as in the case of Sensex.
In this concern the study of the relationship between the volatility of stock market
with that of the investment in gold market is of prime importance. A comprehensive
study of the gold market and its volatility pattern and its comparison with the stock
market will depict the relationship between these two markets. From which the investors
can better assess the risk and return of the markets and can take investment decisions
accordingly.
In our study, four different global stock markets indices viz. BSE Sensex (India),
Dow Jones Industrial average Index (USA), FTSE 100 Index (U.K.) and Nikkei Index
(Japan) are considered. The correlation of movement of Gold prices with respect to stock
markets fluctuation is studied over a period of last three years. The daily spot rates of
gold and daily closing prices of indices form the basis of secondary data. Though the very
4
short term trend may not be accurately determined, but in the long term, the study can
definitely help when the right time to invest in Gold or stock markets is.
Objective of the study
The objectives of the study are mentioned as below:
1) To study the relationship between the volatility of four different global stock
markets with that of the spot Gold market.
2) To find the correlation between US, India, UK and Japan Gold prices.
3) To find the correlation between US, India, UK and Japan Stock market indices.
Research Methodology
A descriptive research methodology is adopted to find the relation between the stock
market movement and gold price movement and al the relation between their returns. The
data has been collected from the secondary source only. The secondary data are collected
from various books and journals, Securities and Exchange Board of India circulars, world
gold council publications, Securities and Exchange Board of India, Commodity Year
Book of Multi Commodity Exchange Limited and websites having historical data like
yahoo finance. The data so collected were classified and tabulated for analysis and
interpretation. To find out the relationship between the gold market and the stock market,
regression models are built. For this purpose SPSS Statistical Package is used.
Limitations
Some of the limitations that are faced during the study are:
1) The information collected is limited by authenticity and accuracy.
2) The time period which is studied is not sufficient to precisely support the hypothesis
with stronger evidence.
5
Chapter 2:
LITERATURE REVIEW
6
CAPITAL MARKETS
Introduction to capital market
Essentially, capital is wealth, usually in the form of money or property. Capital markets
exist when two groups interact: those who are seeking capital and those who have capital
to provide. The capital seekers are the businesses and governments who want to finance
their projects and enterprises by borrowing or selling equity stakes. The capital providers
are the people and institutions who are willing to lend or buy, expecting to realize a
profit. Investment capital is wealth that is put to work by investors. By participating in
the stock and bond markets, which are the pillars of the capital markets, the investors
commit their capital by investing in the equity or debt of issuers that they believe have a
viable plan for using that capital. Because so many investors participate in the capital
markets, they make it possible for enterprises to raise substantial capital, which is enough
to carry out much larger projects than might be possible otherwise. The amounts they
raise allow businesses to innovate and expand, create new products, reach new
customers, improve processes, and explore new ideas. They allow governments to carry
out projects that serve the public through building roads and firehouses, training armies,
or feeding the poor etc. All of these things could be more difficult, perhaps even
impossible to achieve without the financing provided by the capital market place. The
capital market can be categorized into two parts, i.e. primary market and the secondary
market. The primary market deals with the raising of capital by the government and the
corporate entities, whereas the secondary market deals with the trading of the shares of
the companies.
Primary Market
There are actually two levels of the capital markets in which investors participate: the
primary markets and the secondary markets. Businesses and governments raise capital in
primary markets, selling stocks and bonds to investors and collecting the cash. Essentially
7
primary market is one of the mechanisms from where the government or the corporate
entities raise capital for the first time through initial public offerings (IPO). FPO (Follow
on Placement Offer) is another way of raising capital from the market in which the entity
raises capital from the market for the second time. The primary market also includes the
rights issue and private placement. When new shares are issued in favor of the existing
shareholders or the owners, it is known as rights issue. Similarly, when the shares are
privately issued to the institutional investors or high net-worth individuals, it is known as
private placement.
Secondary Market: The Stock Market
In secondary markets, investors buy and sell the stocks and bonds among themselves or
more precisely, through intermediaries. While the money raised in secondary sales
doesn’t go to the stock or bond issuers, it does create an incentive for investors to commit
capital to investments in the first place. The stock markets are essentially the secondary
market, where buying and selling of the shares take place. The price at which each
buying and selling transaction takes is determined by the market forces i.e. demand and
supply for a particular stock. Suppose ABC Co. Ltd. enjoys high investor confidence and
there is an anticipation of an upward movement in its stock price. More and more people
would want to buy this stock (i.e. high demand) and very few people will want to sell this
stock at current market price (i.e. less supply). Therefore, buyers will have to bid a higher
price for this stock to match the ask price from the seller which will increase the stock
price of ABC Co. Ltd. On the contrary, if there are more sellers than buyers (i.e. high
supply and low demand) for the stock of ABC Co. Ltd. in the market, its price will fall
down. In earlier times, buyers and sellers used to assemble at stock exchanges to make a
transaction but now with the dawn of IT, most of the operations are done electronically
and the stock markets have become almost paperless. Now investors don’t have to gather
at the Exchanges, and can trade freely from their home or office over the phone or
through Internet.
8
Scenario of Indian Capital Markets (2010-2011)
Equity market in India witnessed a significant uptrend during 2010-11 till October
2010. This was primarily on account of significant FII inflows into India and number of
IPOs/FPOs of companies like Coal India Ltd, Power Grid Corporation of India Ltd etc.
coming to primary market which attracted number of investors to capital market.
However, post Diwali in November 2010 when market touched its peak, Indian securities
market took downward trend from December 2010 to February 2011 on account of
significant FII outflows and concerns raised on domestic and international issues.
However, the markets got revived in March 2011 as compared to February 2011 on
account of easing of concerns on domestic and international issues and FIIs being net
investor in Indian markets in March, 2011 which helped the market sentiments.
Primary market
• Indian primary market witnessed renewed activity in terms of resource mobilisation
and number of issues during 2010-11, continuing its momentum from 2009-10. In
view of the recovery witnessed in equity markets post global financial crisis,
companies, largely public sector entered the primary market during 2010-11.
• Capital was raised to the tune of Rs. 67,609 crores through 91 issues (81 equity and
10 debt issues) during 2010-11, higher than Rs. 57,555 crores mobilized through 76
issues during 2009-10.
• There were 53 IPOs during 2010-11 as against 39 during 2009-10. The amount raised
through IPOs during 2010-11 was at Rs. 35,559 crores as compared to Rs. 24,696
crores during 2009-10.
• The biggest IPO in 2010-11 was of Coal India with issue size of Rs. 15,199.4 crores
in October 2010.
• Sector-wise classification reveals that 77 private sector and 14 public sector issues
mobilized resources through primary market during 2010-11 as compared to 70
private sector and six public sectors issues in 2009-10.
9
• The share of private sector in total resource mobilisation stood at 43.5 % in 2010-11
as compared to 45.9 % in 2009-10, consequently, the share of public sector in total
resource mobilisation increased to 56.5 % from 54.1 % during the same period.
• There were 36 mega issues in 2010-11 as compared to 30 mega issues in 2009-10.
(An issue of Rs. 300 crores and above is referred to as Mega Issue).
• These 36 mega issues mobilized Rs. 59,547.4 crores which amounts to 88.1 % of total
resource mobilisation during the year.
Secondary Market
• Secondary market segment showed signs of recovery of Indian Corporates from
global financial crises witnessed in 2008.
• During 2010-11, Foreign Institutional Investors (FIIs) made record investments of Rs.
1,46,438 crores in the Indian market (equities and debt combined) surpassing the
previous high of 2009-10 net investments of Rs. 1,42,658 crores.
• Mobilisation of resources by mutual funds was less than redemptions which resulted
into substantial net outflow of funds from mutual funds.
• During 2010-11, Sensex reached its maximum level at 21005 on November 5, 2010
and touched its bottom at 16022.5 on May 25, 2010.
• On analyzing performance of sectoral indices at BSE, though there was an uptrend in
majority of sectoral indices till November 2010, however at the end of year only three
sectoral indices i.e. Consumer Durable, Bankex and Auto index witnessed significant
increase in their levels.
• During 2010-11, turnover of all stock exchanges in India in the cash segment
decreased by 15.1 percent to Rs. 46,85,034 crores from Rs. 55,18,469 crores in 2009-
10
• The market capitalization of all listed companies at BSE increased by 10.9 % to Rs.
68, 39,084 crores in 2010-11 from Rs. 61, 65,619 crores in 2009-10.
10
BSE SENSEX
The Bombay Stock Exchange SENSEX also referred to as BSE 30 is a free-float market
capitalization-weighted stock market index of 30 well-established and financially sound
companies listed on Bombay Stock Exchange. The 30 component companies are
representative of various industrial sectors of the Indian economy. The base value of the
SENSEX is taken as 100 on April 1, 1979, and its base year as 1978-79. India has the
highest number of companies listed in the stock market. Out of this, about 75 % of the
companies are listed with the Bombay Stock Exchange.
The Bombay Stock Exchange (BSE) regularly reviews and modifies its composition to be
sure it reflects current market conditions. Initially, the index was calculated based on the
‘full market capitalization’ method. However this was shifted to the free float method
with effect from September 1, 2003. Instead of using a company's outstanding shares; it
uses its float, or shares that are readily available for trading. The free-float method,
therefore, does not include restricted stocks, such as those held by promoters, government
and strategic investors.
The index has increased by over ten times from June 1990 to the present. Using
information from April 1979 onwards, the long-run rate of return on the BSE SENSEX
works out to be 18.6% per annum, which translates to roughly 9% per annum after
compensating for inflation.
11
DOW JONES INDUSTRIAL AVERAGE INDEX
The Dow Jones Industrial Average also called the Industrial Average, the Dow Jones, the
Dow 30, or simply the Dow, is a stock market index, and one of several indices created
by Charles Dow. It was founded on May 26, 1896, and is now owned by Dow Jones
Indexes, which is majority owned by the CME Group. It is an index that shows how 30
large, publicly owned companies based in the United States have traded during a standard
trading session in the stock. Roughly two-thirds of the DJIA's 30 component companies
are manufacturers of industrial and consumer goods. The others represent industries as
diverse as financial services, entertainment and information technology. Unlike many
other indices, the DJIA is not a weighted index i.e. the Index does not take market
capitalization into account. The value of the Dow is not the actual average of the prices of
its component stocks, but rather the sum of the component prices divided by a divisor,
which changes whenever one of the component stocks has a stock split or stock dividend,
so as to generate a consistent value for the index.
The Dow 30 is among the most closely watched U.S. benchmark indices tracking
targeted stock market activity. Although Dow compiled the index to gauge the
performance of the industrial sector within the American economy, the index's
performance continues to be influenced by not only corporate and economic reports, but
also by domestic and foreign political events such as war and terrorism, as well as by
natural disasters that could potentially lead to economic harm. Components of the Dow
trade on both the NASDAQ OMX and the NYSE Euronext, two of the largest stock
exchanges.
12
FTSE 100 INDEX
The FTSE 100 Index, also called FTSE 100 is a share index of the 100 most highly
capitalized UK companies listed on the London Stock Exchange. The index is maintained
by the FTSE Group, an independent company jointly owned by the Financial Times and
the London Stock Exchange. The index began on 3 January 1984 with a base level of
1000; the highest value reached to date is 6950.6, on 30 December 1999. FTSE 100
companies represent about 81% of the market capitalization of the whole London Stock
Exchange. The constituents of the index are determined quarterly; the largest companies
in the FTSE 250 Index are promoted if their market capitalization would place them in
the top ninety firms of the FTSE 100 Index. It is the most widely used of the FTSE
Group's indices, and is frequently reported as a measure of business prosperity.
In the FTSE, share prices are weighted by market capitalization, so that the larger
companies make more of a difference to the index than smaller companies. The Free float
Adjustment factor represents the percentage of all issued shares that are readily available
for trading. The factor is then rounded up to the nearest multiple of 5% for calculation
purposes. To find the free-float capitalization of a company, first find its market cap
(number of shares x share price) then multiply by its free-float factor. Free-float
capitalization, therefore, does not include restricted stocks, such as those held by
company insiders.
Index level = Σ (Price of stock x Number of shares) x Free float Adjustment factor
Index Divisor
13
NIKKEI 225
The Nikkei-225 Stock Average is a price-weighted average of 225 top-rated Japanese
companies listed in the Tokyo Stock Exchange. The Nikkei Stock Average was first
published on May 16, 1949, where the average price was ¥176.21 with a divisor of 225.
It is a price-weighted average (the unit is yen), and the components are reviewed once a
year.
The Nikkei average has deviated sharply from the textbook model of stock averages
which grow at a steady exponential rate. The average hit its all-time high on December
29, 1989, during the peak of the Japanese asset price bubble, when it reached an intra-day
high of 38,957.44 before closing at 38,915.87, having grown six fold during the decade.
Stocks are weighted on the Nikkei 225 by giving an equal weighting based on a par value
of 50 yen per share. Events such as stock splits, removals and additions of constituents
impact upon the effective weighting of individual stocks and the divisor. The Nikkei 225
is designed to reflect the overall market, so there is no specific weighting of industries.
Stocks are reviewed annually and announcements of review results are made in
September. Changes, if required, are made at the beginning of October. Changes may
also take place at any time if a stock is found to be ineligible (e.g., delisting). After a
stock has been replaced, the divisor is reviewed and modified to ensure a smooth
transition of the stock index.
14
INDEX CHARTS
Fig.1 BSE Index chart
Fig.2 DJIA Index chart
15
Fig.4 NIKKEI 225 Index chart
Fig.3 FTSE 100 Index chart
16
GOLD
Gold has been synonymous to wealth and prosperity through the ages. In the
modern history, Gold became the international currency as the Gold standard came into
existence. Even after dismantling of Gold standard, Gold existed as the backbone of
international trade and economics as all the countries tried to accumulate tones of it. Till
today, Gold has retained its basic use as a commodity without losing its sheen as a
currency.
The following characteristics of Gold have enabled it play this role:
• It is durable, homogenous and divisible
• Gold’s rarity gives it intrinsic value and that value is high per unit of volume.
• Its value is recognized across the globe and is traded in a continuous market.
• It occurs in a virtually pure and workable state, whereas most other metals tend to
be found in ore-bodies that pose some difficulty in smelting.
Gold as an investment
Gold is a foundation asset within any long term savings or investment portfolio. For
centuries, particularly during times of financial stress and the resulting 'flight to quality',
investors have sought to protect their capital in assets that offer safer stores of value. A
potent wealth preserver, gold’s stability remains as compelling as ever for today’s
investor. A number of reasons portraying gold as a worthy investment are:
1) Portfolio diversification
Most investment portfolios primarily hold traditional financial assets such as stocks and
bonds. Diversifying the portfolio can offer added protection against fluctuations in the
value of any single asset or group of assets. Risk factors that may affect the gold price are
quite different in nature from those that affect other assets. Statistically, portfolios
containing gold are generally more robust and less volatile than those that do not.
17
2) Inflation hedge
Market cycles come and go, but over the long term, gold retains its purchasing power.
Gold’s value, in terms of the real goods and services that it can buy, has remained
remarkably stable for centuries. In contrast, the purchasing power of many currencies has
generally declined, due for the most part to the rising price of goods and services. Hence
investors often rely on gold to counter the effects of inflation and currency fluctuations.
3) Currency hedge
Gold is employed as a hedge against fluctuations in currencies, particularly the US dollar.
If the world’s main trading currency appreciates, the dollar gold price generally falls. On
the other hand, a fall in the dollar relative to the other main currencies produces a rise in
the gold price. For this reason, gold has consistently proved to be one of the most
effective assets in protecting against dollar weakness.
4) Risk management
Gold is significantly less volatile than most commodities and many equity indices. It
tends to behave more like a currency. Assets with low volatility will help to reduce
overall risk in our portfolio, adding a beneficial effect on expected returns. Gold also
helps to manage risk more effectively by protecting against infrequent or unlikely but
consequential negative events, often referred to as “tail risks”.
5) Demand and supply
The price of gold tracks the shifting balance of supply and demand. Long lead times in
gold mining mean production of gold is relatively inelastic, regardless of increases in
demand. That’s why the rally in the gold price since 2001 has not given rise to a
meaningful increase in gold production levels.
Demand for gold has shown sustained growth recently, due at least in part to rising
income levels in key markets. These supply and demand factors have laid foundations for
gold’s most positive outlook in over a quarter of a century
18
Evolution of gold in global economy
1944 - Establishment of the IMF puts gold at the centre of the new international
monetary system (Bretton Woods System)
• All member countries should establish “par values” for their currencies in terms of
gold, or in terms of the US dollar which itself was defined in terms of gold ( 1USD =
$35 an ounce ).
• To enable lending by IMF, its members were also required to pay 25% of their
subscription to the Fund in gold. Members had to buy and sell gold at the fixed price.
• It resulted in IMF holdings of gold rising to 153 million ounces by 1975, at the time
worth $21 billion.
Early 1960s – Central banks try to stabilize the price of gold
• An agreement among central banks called ‘The Gold Pool’ was established to hold
the price of gold close to the then official price of $35 an ounce.
• It followed a speculative attack on dollar that brought the price up to $40 an ounce.
• To tackle it, bank and U.S. authorities sold gold on a substantial scale to bring the
price down.
• The Cuba missile crisis of July 1962 triggered record demands for gold on the
London market, which was again met by official selling. The objective was to avoid
fluctuations in gold prices.
• The central banks abolished The Gold Pool in 1968, agreeing that they would no
longer supply gold to the market but transact only among themselves.
• This established a two-tier system – price based on supply and demand in market and
the other for official transactions at the official price.
• This agreement lasted until November 1973, when the price of gold was allowed to
move freely, following the suspension of dollar convertibility into gold in August
1971.
19
1978 - The IMF attempts to write gold out of the system
• The Second Amendment of the Articles barred members from fixing their exchange
rates to gold and removed the obligation on members to conduct transactions in gold
at the official gold price.
• The IMF was instructed to dispose of 50 million ounces of its gold stock of 153
million ounces. It achieved this partly by sales to the market and partly by giving
some gold to members in relation to their quotas.
• Few countries showed any inclination to sell the gold handed to them, and in the vast
majority of cases it continues to sit on their books.
The European Central Bank (ECB) and Gold
• The ECB decided that the national central banks participating in the euro area should
include gold in the initial transfer of foreign reserve assets to ECB by Jan 1, 1999.
• The collective initial transfer of foreign reserves to ECB was approximately EUR
39.46 billion. It asked its members that 15% of this initial transfer should be in gold
and remaining 85% in foreign currency assets.
• There was no implication by ECB to maintain a constant ratio of 15% of its reserves
in gold in the future. ECB’s total reserves have grown considerably since then due to
the sharp increase in the gold price.
• As at September 2010, the ECB had 26% of its reserves in gold.
The first Central Bank Gold Agreement (CBGA1)
• At that time, Central banks held nearly a quarter of all world gold so their actions
were of key interest to the gold market. Gold remained an important element of
global monetary reserves.
20
• Many central banks of Western Europe having large stocks of had then sold gold or
announced plans to do so causing further falls in the price of gold and instability in
market.
• The market falls caused considerable pain for gold producing countries. Among these
were a number of developing countries, including a HIPCs (Heavily Indebted Poor
Countries).
• In response, 15 European central banks drew up the first Central Bank Gold
Agreement. They agreed to limit their collective sales to 2,000 tonnes over next 5
years.
• In addition a number of other major holders like US, Japan etc. informally associated
themselves with the Agreement.
• It prompted a sharp spike in the price over the following days and the major element
of instability had been effectively removed with the introduction of greater
transparency.
The second Central Bank Gold Agreement (CBGA2)
• On March 8th 2004, the signatory banks announced the second Central Bank Gold
Agreement. Like the first Agreement, CBGA2 covered a five-year period, from
September 27th 2004 to September 26th 2009.
• While the rest of the Agreement covered similar ground to the first, there were some
important differences.
• The maximum amount of gold that the signatories could sell over the five years was
2,500 tonnes, compared to 2,000 tonnes in the first Agreement.
• It happened as the signatories had sold significantly less than the permitted ceiling
they had set themselves.
The third Central Bank Gold Agreement (CBGA3)
• CBGA3 covers a five-year period, in this case from 27 September 2009 to 26
September 2014.This Agreement also included two important departures from the
prior Agreements.
21
• First, the collective ceiling was reduced so that total sales over this period will not
exceed 2,000 tonnes, 500 tonnes lower than the 2,500 tonnes in second agreement.
• As signatories to CBGA2 had significantly undersold the permitted annual ceiling in
the final two years of that Agreement, the new lower ceiling did not create any impact
on the gold price.
• In both the previous Agreements, signatories undertook not to increase their activities
in the derivatives and lending markets above the levels of September 1999, when the
first CBGA was signed which followed in third agreement too.
Market moving factors for gold prices
• The global prices are driven by a host of factors with macro-economic factors like
strength of the economy, rising importance of emerging markets, currency
movements, interest rates etc.
• Supply-demand is a major influencer, amid rising global investor demand and
sometimes interrupted productions.
• Shifts in official gold reserves, reports of sales/purchases by central banks act as
major price influencing factors, whenever such reports surface.
• The investment in gold is influenced by comparative returns from other markets
like stock markets, real estate other commodities like crude oil.
• Indian gold prices are highly correlated with international prices. However, the
fluctuations in the US Dollar impact domestic gold prices to major extent.
• Domestically, demand and consequently prices to large extent are influenced by
seasonal factors like marriages.
22
Gold in India
India’s centuries old gold industry is the world’s biggest market for the metal,
with imports meeting almost all the country’s requirements for jewellery and investment.
India is the world's largest consumer of gold. India's gold demand is firmly embedded in
cultural and religious traditions. It is also valued in India as a savings and investment
vehicle and is the second preferred investment after bank deposits.
The gold market has benefited significantly from India’s economic liberalization
which has served to accelerate the country’s growth. In the period from 1996-2001,
Indian gold sales were broadly stable in value terms, averaging Rs284 bn per annum.
Spending was especially strong in 1998 due to the release of pent up demand following
the removal of import controls in the previous year. But then, in the period from 2002-
2010, gold sales accelerated strongly – with the exception of 2009 when record rupee
prices and a major deterioration in the domestic economy impacted demand. In 2010, the
Indian economy rebounded from the global financial crisis and so did the demand for
gold.
Demand for Gold in India
Indians hold the largest stock of gold in the world, 18,000 tonnes of which is held by
households. It is estimated that 7% of India’s $256 billion in total household savings is
currently held in gold. This stock is likely to grow over the next decade. As India's
domestic primary production of gold is very less, at around 2-3tonnes a year, the country
imports most of its domestic requirement. While Indian gold demand accounted for 32%
of global consumer demand in 2010 at 963 tonnes, the psychology of Indian demand is
unlike that of any other market. Despite a 400% rise in the Rupee gold price in the last
ten years, gold demand from Indian consumers has shown no signs of dwindling. History
shows that during periods of major price increases, demand can stall. However, as wealth
increases, Indians will continue to buy gold as the price gradually rises.
23
Cultural beliefs
Cultural ideas about gold have influenced all communities of India for generations.
Gold’s mythology is sewn into the fabric of Indian society. Gold’s narrative is a
permanent thread in the symbols and rituals of the most widespread faith. In India,
Hinduism, this is practiced by around 80% of the population. For most Indians gold is
sacred; an embodiment of divinity and a symbol of purity, prosperity and good fortune
that can adorn the body and celebrate life.
Jewellery
In the last decade, 75% of gold demand in India has taken the form of jewellery. The
motivation for a jewellery purchase is inextricably linked to value, wealth preservation
and growth rather than pure adornment. The rural agricultural sector, approximately 70%
of the Indian population, has been the source of more than two thirds of gold demand.
This is partly because in practical terms one’s wealth must be easily worn on one’s
person, easily liquidated and relatively stable as a value store. Indian jewellery demand
witnessed a remarkable surge to 745.7 tonnes in 2010, 13% above the previous peak in
1998. In local currency terms, Indian jewellery demand more than doubled in 2010; to
Rs. 1,342 bn. This compares with 2009 demand equal to Rs669 bn.
Forex reserves
Gold has also long formed an important part of India’s currency reserves. Although, even
with a substantial stock of gold reserves, gold’s share in total reserves had declined over
the past decade due to the vast growth in dollar-denominated assets. This led the Reserve
Bank of India (RBI) to rebalance its reserves through the purchase of 200 tonnes of gold
in late November 2009, taking the RBI’s stock of gold to 558 tonnes or 8.5% of total
reserves and making it the eleventh largest official sector holder of gold in the world.
24
GOLD CHARTS
Fig.5 Gold Price (INR)
Fig.6 Gold Price (USD)
25
Fig.7 Gold Price (GBP)
Fig.8 Gold Price (JPY)
26
Gold Prices and Stock Market Indices
Gold price volatility and Stock market returns in India
The twin factors namely increase in global spot gold prices and appreciation of USD
against INR, led to sharp rise in gold prices in India in the recent past. Since the gold
prices in India are influenced by international factors, its volatility is very important.
Volatility involves short term - monthly, weekly or even hourly fluctuations in gold
prices as measured by their absolute percentage changes during a particular period. If we
look at the rolling standard deviation of monthly gold prices since 2000, the prices are
more volatile after July 2007 which is almost the same time when the slow down started
in USA as a result of the sub-prime crisis. A look at the historic data brings out that when
the stock market crashes or when the dollar weakens, gold continues to be a safe haven
investment because gold prices rise in such circumstances. It is no surprise that many
investors, big and small have chosen to hedge their investments through gold at the time
of crises. Gold prices have been on an uptick since 2000, while the stock market declined
from 2000 to 2003 and then again in 2008. In 2008 when the market was suffering from
bearish phase worldwide, gold prices spiked as panic spread across global markets. So far
since March 2009 in India signs of recovery in the stock markets have emerged. At the
same time gold continues to forge ahead, albeit at a slower pace. In 2008, the two assets
prices – equity and gold, were moving in opposite directions, displaying the ability of the
yellow metal to protect one's portfolios at the time of a dip. In fact, during each of the
two prolonged bear phases (lasting at least a year) over the past decade, gold has
provided an effective hedge. Gold has not yet lost its prime importance as a hedge against
loss of wealth in times of crises.
The relationship among oil prices, gold prices and individual industrial sub-indices in
Taiwan.
The fact that oil and gold prices keep rising to record levels influences financial markets
deeply and attracts attention from both academic and practical perspectives. It is believed
27
that commodity prices should have different degrees of influences to individual industries
instead of the whole market. As the oil prices and gold prices make the Volatility
Spillover Effects, the fluctuations in the gold prices will be effected by the severe
fluctuations in the oil prices. The fluctuations in oil prices will influence both the
Electronic Industrial Sub-Indices and the Rubber Industrial Sub-Indices. The correlations
among oil prices and the Electronic Industrial Sub-Indices and the Rubber Industrial Sub-
Indices are positive. The Chemical Industrial Sub-Indices, Cement Industrial Sub-Indices,
Automobile Industrial Sub-Indices, Food Industrial Sub-Indices, and Textiles Industrial
Sub-Indices will be influenced by fluctuations in gold prices.
London gold prices and stock price indices in Europe and Japan
For the period beginning in January 1991 and ending in October 2001 empirical evidence
is examined on the relationship between the price of gold and stock price indices for
markets in Europe and Japan. Three gold prices set in London and 23 stock price indices
for 18 countries are used. The short-run correlation between returns on gold and returns
on US stock price indices is small and negative and for some series and time periods
insignificantly different from zero. Occasionally it is small and positive—but typically
only one-tenth of the magnitude of the sample correlation coefficient between returns on
the FTSE All Share and DAX 100 indices. Over the period examined, there is no co-
integration involving a gold price and a stock price index. That is, there is no long-run
equilibrium and the series do not share a common stochastic trend. Only weak short-run
relationships are evident.
The price of gold and stock price indices for the United States For the period beginning in January 1991 and ending in October 2001 empirical evidence
is examined on the relationship between the price of gold and stock price indices for the
United States. Three gold prices set in London and one set in New York are used,
together with six stock price indices of varying coverage. The short run correlation
between returns on gold and returns on US stock price indices is small and negative and
for some series and time periods insignificantly different from zero. Over the period
examined, there is no co-integration involving a gold price and US stock price index.
28
That is, there is no long-run equilibrium and the series do not share a common stochastic
trend. Only short-run relationships are evident. Granger causality tests find evidence of
unidirectional causality from US stock returns to returns on the gold price set in the
London morning fixing and the closing price. For the price set in the afternoon fixing,
there is clear evidence of feedback between the markets for gold and US stocks.
Gold: Hedging against tail risk
The research found that gold effectively helps manage risk in a portfolio, not only by
means of increasing risk-adjusted returns, but also by reducing expected losses incurred
in extreme circumstances. Such tail-risk events, while unlikely can be seen to have a
damaging effect on an investor’s capital. The analysis suggests that even relatively small
allocations to gold, ranging from 2.5% to 9.0%, can have a positive impact on the
structure of a portfolio. It is found that, on average such allocations can reduce the Value
at Risk (VaR) of a portfolio, while maintaining a similar return profile to equivalent
portfolios which do not include gold. For the eight portfolios analyzed using data from
January 1987 to July 2010, adding gold reduced the 1% and 2.5% VaR by between 0.1%
and 18.5%. Moreover, that portfolios which included gold outperformed those which did
not in 18 out of 24 occasions (75%) when doing an in-sample analysis, and in seven out
of ten (70%) in out-of-sample tests. Finally, gold also has other unique characteristics
that make it very useful in periods of financial distress. For example, the gold market is
highly liquid and many gold bullion investments have neither credit nor counterparty
risk.
Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds and Gold. The paper analyzes whether gold works as a safe haven asset in financial markets. A safe
haven asset is distinguished from a hedge and a diversifier asset, which provide
diversification benefits on average but not necessarily when they are needed most, that is,
in times of market turmoil. The empirical results show that gold is a safe haven for
stocks. However, gold is generally not a safe haven for bonds in any market. Gold only
29
functions as a safe haven for a limited time, around 15 trading days. In the longer run,
gold is not a safe haven, that is, investors that hold gold more than 15 trading days after
an extreme negative shock lose money with their gold investment. This finding suggests
that investors buy gold on days of extreme negative returns and sell it when market
participants regain confidence and volatility is lower. The constant and time-varying
relations between U.S., U.K. and German stock and bond returns and gold returns are
studied to investigate gold as a hedge and a safe haven. It is found that gold is a hedge
against stocks on average and a safe haven in extreme stock market conditions. A
portfolio analysis further showed that the safe haven property is short-lived.
Relationships among Oil Price, Gold Price, Exchange Rate and International Stock Markets When talking about macro economy including economic prosperity and recession, the
stock market up and down, and consumer price index higher or lower, one cannot help
but think of the investment “Gold” which maintains its value well and can also hedge
against inflation. Historical experience shows that in countries during period of stock
market slump, the gold always trends higher. Therefore this article would like to explore
the impact of gold price fluctuations on stock indices in various countries. The paper uses
daily data and time series method to explore the impacts of fluctuations in crude oil price,
gold price, and exchange rates of the US dollar vs. various currencies on the stock price
indices of the United States, Germany, Japan, Taiwan, and China respectively, as well as
the long and short-term correlations among these variables. Empirical results show that
there exist co-integrations among fluctuations in oil price, gold price and exchange rates
of the dollar vs. various currencies, and the stock markets in Germany, Japan, Taiwan and
China. This indicates that there exist long-term stable relationships among these
variables. Whereas there is no co-integration relationship among these variables and the
U.S. stock market indices which indicates that there is no long-term stable relationship
among the oil price, gold price and exchange rate and the US stock market index. In
addition, empirical results of the causal relation show that in Taiwan, for example, oil
price, stock price and gold price have two-way feedback relations.
30
Chapter 3:
RESEARCH METHODS AND
PROCEDURE
31
Research Design
A Research Design is a frame work or blue print for conducting any research project. It
details the procedures necessary for obtaining the information needed to structure or
solve any research problem. Although a broad approach to the problem is initially
developed by researcher, the research design specifies the details– the nuts and bolts– of
implementing the approach. It lays the foundation for conducting the project. A good
research design will ensure that the study is conducted effectively and efficiently. There
are three types of research designs viz.
a) Exploratory: This type of research is done when objective is not known and it helps in
providing insight and understandings to define a problem.
b) Descriptive: After defining a problem from exploratory research, we should define
questions, hypothesis, method of analysis, data collection and data analysis of problem.
c) Causal: It helps in determining the cause and effect relationships. Manipulation of one
or more independent variables is done to match with the objective of our problem.
� In this project, Descriptive Research Design had been used to determine the degree
to which different variables are associated.
Research Objectives
The objectives of the study are mentioned as below:
1) To study the relationship between the movement and volatility of four different
global stock markets with that of the Gold spot market.
2) To find the correlation between US, India, UK and Japan Gold prices.
3) To find the correlation between US, India, UK and Japan Stock market indices.
32
Fig.9 Market Timings
Population, Sample and Sampling design
The four stock market indices are chosen in such a manner that they broadly cover the
different time zones of the world. Thus on a particular date, markets start firstly on Tokyo
stock exchange followed by Bombay Stock exchange. Then comes London stock
exchange and finally New York stock exchange. Same is the case in spot market for gold.
When market in one country is about to close, the market in next region starts for the day,
thus making an overlap pattern.
For stock indices, the closing point for the particular day is taken. The gold spot rates as
published by world gold council are used. The duration for which the data is collected is
of 3 years starting from January 2009 till February 2012. As we know that in January
2009, the world was in the initial stages of economic downturn and it was during that
time, that investors were very careful while building their portfolios. Hence this period
will give a fairer view about the relation between market indices and gold prices.
Data Collection
In this project, only Secondary data has been considered to quantitatively prove the
hypothesis.
There were some instances in data when the working and non working days at different
regions were not same on a particular date. To remove this error, only the dates common
to all four indices i.e. when all exchanges opened on a particular date are chosen.
33
Date TSE BSE LSE NYSE
6/7/2010 Open Open Close Open Not selected
7/7/2010 Close Open Close Close Not selected
8/7/2010 Open Open Open Open Date Selected
Since the stock market indices use home currency to decide their points, the price of gold
is considered in home currency rates i.e. in JPY for Tokyo, INR for Mumbai, GBP for
London and USD for New York. This eliminates the variation arising out of
convertibility issues.
Data Analysis
Statistical packages like SPSS and MS Excel will be used to analyze the numerical data.
Different analyses to be performed are:
• Formulating Regression equations
• Correlation between data sets
• Descriptive Statistics
• Line charts
Table 1. Data Selection Criteria
34
Chapter 4:
FINDINGS AND DATA
ANALYSIS
35
1. STOCK INDICES AND GOLD PRICE
a) Stock Indices
N Minimum Maximum Mean Std. Deviation Coef. of Variation
DJIA 705 6547.05 12949.87 10595.6539 1469.35245 0.1386
BSE 705 8160.40 21004.96 16593.7909 2799.57334 0.1687
FTSE_100 705 3512.10 6091.30 5263.3152 608.22201 0.1155
NIKKEI 705 7086.03 11292.83 9565.6476 826.00704 0.0863
Valid N (listwise) 705
Interpretation:
The above data table reflects the four stock indices in past three years. Since all the
four data sets have varied mean and standard deviation values, we use coefficient of
variation to describe consistency. Coefficient of variation is least for NIKKEI index
with 8.63% thereby depicting uniformity and consistency in value relative to others.
For BSE, value is 16.87% which states that variability in value is almost double than
that of NIKKEI. The above data is displayed graphically in form of a Box Plot on
next page.
Table 2. Descriptive Statistics of Indices
36
BOX PLOT
Fig.10 Stock Indices Box Plot
37
b) Correlation between Stock Indices
Table 3. INDEX MOVEMENT (Correlations)
DJIA BSE FTSE_100 NIKKEI
DJIA Pearson Correlation 1 .789** .945
** .258
**
Coef. Of Determination .622 .893 .066
N 705 705 705 705
BSE Pearson Correlation .789** 1 .888
** .555
**
Coef. Of Determination .622 .788 .308
N 705 705 705 705
FTSE_100 Pearson Correlation .945** .888
** 1 .465
**
Coef. Of Determination .893 .788 .216
N 705 705 705 705
NIKKEI Pearson Correlation .258** .555
** .465
** 1
Coef. Of Determination .066 .308 .216
N 705 705 705 705
**. Correlation is significant at the 0.01 level (2-tailed).
Interpretation
On a particular date, the Markets open at NIKKEI, then at BSE, followed by FTSE 100
and finally DJIA. Thus every index has relatively maximum correlation with succeeding
market than other two. For e.g. NIKKEI has relatively maximum correlation with BSE
with Pearson coefficient 0.555, followed by FTSE (.465) and least with DJIA (.258).
Similarly BSE has maximum correlation with FTSE (.888) followed by DJIA (.789) on a
particular date.
DJIA and FTSE are highly correlated (.945) and 89.3% changes in DJIA is explained by
FTSE. 78.8% changes in FTSE is due to BSE with correlation coefficient .888. However
the least correlation is showed by NIKKEI Index with DJIA (.258) where only 6.6%
changes in NIKKEI is explained by DJIA.
38
c) Gold Price ( per Troy oz. or 31.103gm)
Table 4. Descriptive Statistics of Gold
N Minimum Maximum Mean Std. Deviation Coef. Of Variation
USD 705 810.00 1895.00 1275.5152 276.85346 0.2175
JPY 705 72661.04 146132.91 108670.0717 15707.73476 0.1445
GBP 705 556.11 1184.19 810.3806 168.78183 0.2082
INR 705 39714.30 91149.91 59969.2787 13431.64581 0.2239
Valid N (listwise) 705
Interpretation
The above data table shows the descriptive statistics of Gold prices in four countries
depicted in their home currency. The most consistent price of gold is seen in Japan with
variation coefficient of 14.45 %. In US and UK the variation is approximately same,
however in India, it is comparatively high. Also, the range of Gold rates is very broad in
India showing high variability in price.
Fig.11 Gold Price Box Plot
39
d) Correlation between Gold Prices
Table 5. GOLD Price Movement (Correlations)
USD JPY GBP INR
USD Pearson Correlation 1 .984** .985
** .972
**
Coef. Of Determination .968 .970 .944
N 705 705 705 705
JPY Pearson Correlation .984** 1 .974
** .947
**
Coef. Of Determination .968 .948 .896
N 705 705 705 705
GBP Pearson Correlation .985** .974
** 1 .973
**
Coef. Of Determination .970 .948 .946
N 705 705 705 705
INR Pearson Correlation .972** .947
** .973
** 1
Coef. Of Determination .944 .896 .946
N 705 705 705 705
**. Correlation is significant at the 0.01 level (2-tailed).
Interpretation
The Gold Price movement in all four countries shows high degree of correlation. Since
Gold is a precious universal commodity, its prices are determined due to demand and
supply in economies. Thus very less chances of arbitration exist.
In the above table, Gold rates movements in US and UK have the highest Pearson
correlation (.985) and coefficient of determination value explains 97% changes in US
gold price explained by UK prices. Almost all the correlations are significant with 95%
or more changes explained by gold prices in other countries. Gold rate correlation in
India and Japan are relatively less (.947) with 89.6% changes in Indian gold prices
explained by Japan prices.
40
2. CORRELATION BETWEEN INDICES AND GOLD PRICES
Table 6. STOCK INDEX AND GOLD (Correlation)
Country No. of
Days
Stock
Index
Gold (in
Currency)
Pearson
Correlation
Coef. Of
Determination
USA 705
DJIA USD 0.846 0.715
India 705
BSE INR 0.411 0.169
UK 705 FTSE
100 GBP 0.633
0.401
Japan 705
NIKKEI JPY -0.096 0.009
Interpretation
The Pearson coefficient is high for movements in DJIA and Gold prices in dollar with
value of 0.846 stating that movement in gold prices is significantly correlated with
movement in DJIA index and 71.5% changes in Gold USD is explained by changes in
DJIA. The correlation between BSE / Gold price in rupees and FTSE 100 with Gold price
in GBP is positive but is moderate. But 16.9% changes in Gold INR are explained by
changes in BSE Sensex while 83.1% is due to other factors. However NIKKEI and gold
price in Japan show a very weak negative correlation. The coefficient of determination is
insignificant with value of 0.9% but the movement trends in opposite direction.
Regression lines: In the figures below, regression lines are drawn for indices and gold
prices. Along with it, moving average curve for 50 days is also drawn. The slope is
positive for all except for NIKKEI where it shows a negative trendline.
41
y = 6.534x + 8288.
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Fig.12 DJIA Trend Lines
Fig.13 Gold (USD) Trend Lines
42
y = 8.694x + 13525
0
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y = 61.31x + 38209
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Fig.14 BSE Trend Lines
Fig.15 Gold (INR) Trend Lines
43
y = 2.273x + 4460.
0
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y = 0.781x + 533.0
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Fig.16 FTSE 100 Trend Lines
Fig.17 Gold (GBP) Trend Lines
44
y = -0.322x + 9679.
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y = 72.03x + 83050
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Fig.18 NIKKEI Trend Lines
Fig.19 Gold (JPY) Trend Lines
45
3. MONTHLY RETURNS OF STOCK INDICES AND GOLD PRICES
a) Stock Indices Monthly Returns
Table 7. Stock Index Monthly Returns
N Minimum Maximum Mean Std. Deviation
DJIA 36 -16.00 13.77 0.9089 6.03712
BSE 36 -12.88 20.30 1.2096 8.05289
FTSE_100 36 -11.75 11.60 0.5925 5.71521
NIKKEI 36 -13.84 13.73 -0.1525 6.50438
Valid N (listwise) 36
Interpretation
From the above data table, the variability in monthly return is expressed through standard
deviation where FTSE index is relatively consistent in monthly returns. The maximum
variability in monthly returns is seen in BSE Index with S.D. value of 8.05 though the
highest monthly return noted is also in BSE index with 20.3% value.
Fig.20 Stock return box plot
46
b) Correlation between Stock Indices Monthly Return
Table 8. Stock Return (Correlations)
DJIA BSE FTSE_100 NIKKEI
DJIA Pearson Correlation 1 .619** .916
** .692
**
Coef. Of Determination .383 .839 .478
N 36 36 36 36
BSE Pearson Correlation .619** 1 .663
** .536
**
Coef. Of Determination .383 .439 .287
N 36 36 36 36
FTSE_100 Pearson Correlation .916** .663
** 1 .665
**
Coef. Of Determination .839 .439 .442
N 36 36 36 36
NIKKEI Pearson Correlation .692** .536
** .665
** 1
Coef. Of Determination .478 .287 .442
N 36 36 36 36
**. Correlation is significant at the 0.01 level (2-tailed).
Interpretation
The Monthly returns of stock indices shows a moderate to high degree of correlation
indicating that the returns in one market have a substantial impact on other market
returns. The highest correlation is between monthly returns of DJIA and FTSE (.916).
About 83.9% monthly returns in DJIA are explained by FTSE return. DJIA also has good
correlation with BSE and NIKKEI with 38.3% and 47.8% changes in DJIA explained by
the two respectively.
FTSE serves as a crucial index as it is closely correlated to all the markets. NIKKEI has
relatively less correlation with others and least with BSE where only 28.7% changes in
BSE monthly returns are explained by NIKKEI returns.
47
c) Gold Price Monthly Returns
Table 9. Gold Price Monthly Returns
N Minimum Maximum Mean Std. Deviation Coef. Of Variation
USD 36 -12.46 14.45 1.7681 5.53260 3.14
JPY 36 -12.62 14.65 1.2316 5.40014 4.39
GBP 36 -8.80 14.78 1.5760 5.83156 3.71
INR 36 -6.18 18.24 2.0096 5.38159 2.67
Valid N (listwise) 36
Interpretation
The average monthly returns are positive for all the markets but it is highest for Indian
gold prices. It also shows the maximum count of return and least variability with
coefficient of variation 2.67. Thus it served as the best market for investing in gold. The
Japanese market showed relatively higher variability with coefficient value of 4.39
Fig.21 Gold price return box plot
48
d) Correlation between Gold Price Monthly Return
Table 10. Gold Return (Correlations)
GOLD_USD GOLD_JPY GOLD_GBP GOLD_INR
GOLD_USD Pearson Correlation 1 .845** .849
** .877
**
Coef. Of Determination .714 .720 .769
N 36 36 36 36
GOLD_JPY Pearson Correlation .845** 1 .740
** .783
**
Coef. Of Determination .714 .548 .613
N 36 36 36 36
GOLD_GBP Pearson Correlation .849** .740
** 1 .880
**
Coef. Of Determination .720 .548 .774
N 36 36 36 36
GOLD_INR Pearson Correlation .877** .783
** .880
** 1
Coef. Of Determination .769 .613 .774
N 36 36 36 36
**. Correlation is significant at the 0.01 level (2-tailed).
Interpretation
The monthly return of gold price in all four countries shows high degree of correlation. In
the above table, Gold rates return in UK and India have the highest Pearson correlation
(.880) depicting the similar nature of returns expected by investor. About 77.4% returns
in UK gold market can be explained by Indian gold market. The return in Japan, UK and
Indian gold markets is significantly correlated with US gold return. More than 70%
variations in US gold returns can be explained by each individual market. But the
correlation in return in Gold prices in Japan with respect to India and UK is moderately
significant with values .783 and .74 respectively which means 61.3% and 54.8% of
monthly returns in India and UK respectively is explained by returns of Japanese gold
market.
49
4. CORRELATION BETWEEN MONTHLY RETURNS OF INDICES AND
GOLD PRICE
Table 11. Stock Return and Gold Return (Correlation)
Country No. of
Months Stock Index
Gold (in
Currency)
Pearson
Correlation
Coefficient of
Determination
USA 36 DJIA USD -0.126 0.016
India 36 BSE INR -0.286 0.082
UK 36 FTSE 100 GBP -0.376 0.141
Japan 36 NIKKEI JPY -0.095 0.009
Interpretation
The Pearson coefficient is negative for monthly returns of all indices and Gold prices in
their respective country. From the above table, DJIA/ Gold in dollars and NIKKEI/ Gold
in yen have a very weak negative correlation. For BSE/ Gold in dollars and FTSE/ Gold
in Pounds, there exists a moderate negative correlation. Still only 14.1% and 8.2%
changes in gold prices in UK and India can be explained by FTSE and Sensex
respectively.
Regression lines: In the figures below, regression lines are drawn for return of indices
and gold prices. Almost all the data points are distributed on both sides of the x axis. The
regression line in most of the charts show a negative slope.
50
y = 0.004x + 1.005
R² = 7E-05
-20
-15
-10
-5
0
5
10
15
20
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37
Series1
Linear (Series1)
y = -0.038x + 2.652
R² = 0.005
-15
-10
-5
0
5
10
15
20
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35
Series1
Linear (Series1)
Fig.22 DJIA Return Trend Line
Fig.23 Gold (USD) Return Trend
51
y = -0.247x + 6.126
R² = 0.097
-15
-10
-5
0
5
10
15
20
25
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37
Series1
Linear (Series1)
y = 0.033x + 1.551
R² = 0.004
-10
-5
0
5
10
15
20
25
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35
Series1
Linear (Series1)
Fig.24 BSE Return Trend Line
Fig.25 Gold(INR) Return Trend Line
52
y = -0.027x + 1.26
R² = 0.002
-15
-10
-5
0
5
10
15
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35
Series1
Linear (Series1)
y = -0.004x + 1.831
R² = 5E-05
-10
-5
0
5
10
15
20
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35
Series1
Linear (Series1)
Fig.26 FTSE 100 Return Trend Line
Fig.27 Gold(GBP) Return Trend Line
53
y = -0.086x + 1.650
R² = 0.019
-15
-10
-5
0
5
10
15
20
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35
Series1
Linear (Series1)
y = -0.063x + 2.555
R² = 0.015
-15
-10
-5
0
5
10
15
20
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35
Series1
Linear (Series1)
Fig.28 NIKKEI Return Trend Line
Fig.29 Gold (JPY) Return Trend Line
54
5. ANNUAL RETURNS ON STOCK AND GOLD
Factors
Yearly Returns (%)
3 yr return (%)
2009 2010 2011 2009-11
DJIA 16.40 9.77 4.04 31.09
GOLD (USD) 24.23 22.57 9.77 58.43
BSE 52.34 14.94 -28.24 40.81
GOLD (INR) 20.45 19.64 26.36 67.41
FTSE 16.44 8.21 -7.62 19.62
GOLD (GBP) 14.77 27.19 10.12 51.95
NIKKEI 15.38 -4.08 -20.68 -6.72
GOLD (JPY) 23.78 10.37 3.37 39.38
Interpretation:
After the 2008 economic recession, 2009 proved to be a good year with all the markets
reviving up and BSE Sensex showed a staggering 52.34 % annual return. But in 2010, the
pace of annual returns slowed down with NIKKEI giving negative returns. 2011 was not
a good year for investors in stock markets as except for DJIA, rest three markets earned
negative returns where BSE was the biggest loser. But on a long term from 2009 to 2011,
BSE index showed maximum returns of 40.81% but NIKKEI was on a losing streak with
negative returns of 6.72%.
However Gold markets showed a positive return in all the years for above four countries.
The highest return for a three year period was in Indian market with 67.41%. On annual
basis, Gold in UK showed relatively maximum yearly return of 27.19% in 2010.
55
6. ANNUALIZED VOLATILITY OF STOCKS AND GOLD
Factors
Annualized Volatility
3 yr volatility
2009 2010 2011 2009-11
DJIA 24.27 16.04 21.15 36.01
GOLD (USD) 20.52 15.64 21.88 34.42
BSE 34.56 16.38 20.97 44.02
GOLD (INR) 19.54 15.73 20.48 32.84
FTSE 23.51 17.71 20.38 35.97
GOLD (GBP) 23.23 16.95 21.14 36.17
NIKKEI 26.93 20.52 23.45 41.41
GOLD (JPY) 21.51 17.74 22.59 36.19
Interpretation:
The annualized volatility is product of daily logarithmic returns in a year and sqrt of
number of trading days in year. Though returns were high in BSE Sensex in 2009, the
volatility or risk was also much high with value of 34.56. In 2010 and 2011, NIKKEI was
the most volatile market but gave negative returns in both the period. Over a period of 3
years, BSE Sensex proved to be the most volatile with 44.02 and the least volatile was the
FTSE market with value of 35.97
The annualized volatility of Gold market was similar in all the four countries with years
2009 and 2011 more fluctuating compared to 2010. For three year period, volatility of
Gold prices was most in UK and Japan while in India, it was relatively less.
56
Chapter 5:
Conclusion
57
Conclusion
The investors diversify their portfolio to minimize risks and maximize their return but it
is important to find the correlation of movement and volatility between different assets.
Stock markets and gold have been considered as important assets and from the above
study, we have come to following conclusions:
• Dow Jones Industrial average index, BSE Sensex and FTSE are significantly
correlated to each other. NIKKEI doesn’t have strong correlation with other
markets.
• Gold prices are significantly correlated in USA, UK , India and Japan
• DJIA and Gold Price in USA are significantly correlated; FTSE and Gold price in
UK; and BSE and Gold price in India are moderately correlated. In Japan,
NIKKEI and Gold prices are not correlated.
• The monthly stock indices returns are highly correlated for DJIA and FTSE; while
all the other indices monthly returns are moderately correlated to each other.
• The monthly gold returns are correlated significantly for all countries with respect
to other three countries.
• There exist a negative correlation between stock market monthly return and gold
monthly return. But the correlation is moderately significant for UK and India and
weekly significant for USA and Japan.
• The returns for three year period from 2009 – 2011 was highest in BSE Sensex
(40.81%) and Gold returns in India (67.41%). NIKKEI showed a negative return.
• The three year volatility was highest in BSE Sensex (44.02) and gold in Japan
(36.19) FTSE was relatively the least volatile market.
58
BIBLIOGRAPHY
59
Literary References
1) Mu-Lan Wang, Ching-Ping Wang and Tzu-Ying Huang (2010), Relationships among
Oil Price, Gold Price, Exchange Rate and International Stock Markets, International
Research Journal of Finance and Economics, Issue 47
2) Brian M. Lucey and Dirk G. Baur, (2010), Is Gold a Hedge or a Safe Haven? An
Analysis of Stocks, Bonds and Gold, The Financial Review, Issue 45
3) P K Mishra, J R Das and S K Mishra(2010), Gold Price Volatility and Stock Market
Returns in India ,American Journal of Scientific Research, Issue 9
4) S.J. Liao and J.T. ChenLiao (2008), The relationship among oil prices, gold prices,
and the individual industrial sub-indices in Taiwan, Working paper, presented at
International Conference on Business and Information (BAI2008), Seoul, South
Korea.
5) Graham Smith(2002), London gold prices and stock price indices in Europe and
Japan , World Gold Council publications
6) Graham Smith(2001), The price of gold and stock price indices for the United States ,
World Gold Council publications
7) Gold: Hedging against Tail Risk(2010), World Gold Council Publications
8) India: Heart of Gold (2011), World Gold Council Publications.
9) Annual Report 2010-2011 (2011), Securities and Exchange Board of India.
Website References
1) www.gold.org
2) www.sebi.gov.in
3) www.forexpros.com
4) www.rbi.org.in
5) www.in.finance.yahoo.com
6) www.ebscohost.com