Relationship Between Gold Price & Sensex

8/7/2019 Relationship Between Gold Price & Sensex

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Relationship Of Gold Price And Sensex

1 M.P.Birla Institute Of Management

A STUDY ON RELATIONSHIP OF

GOLD PRICE AND SENSEX

Submitted in partial fulfilment of the requirementsfor MBA Degree of Bangalore University

Submitted By

DIVAKAR.K

06XQCM6022

Under the Guidance and Supervision

Of

DR NAGESH S MALAVALLI

M.P.BIRLA INSTITUTE OF MANAGEMENT

Associate Bharatiya Vidya Bhavan

# 43, Race Course Road

Bangalore-560001

2006 08


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DECLARATION

I hereby declare that the report entitled. A Study on Relationship

of Gold Prices and Sensex is prepared under the guidance of

Dr Nagesh S Malavalli ( Principal, M P BIRLA INSTITUTE OF

MANAGEMENT) .I also declare that this project report has not

been submitted to any other University / Institute for the award of

any other degree, diploma, fellowship or other similar title or

prizes.

Date: DIVAKAR.K

Place: Bangalore

(O6XQCM6022)


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PRINCIPALS CERTIFICATE

This is to certify that this report titled. A STUDY ON

RELATIONSHIP OF GOLD AND SENSEX" is the result of project

work undergone by Divakar.K, bearing the Register Number

06XQCM6022, under the guidance of Dr Nagesh S Mallavalli .

This has not formed a basis for the award of any Degree/Diploma

for any other University.

Place: Bangalore Dr. Nagesh.S.Malavalli

Date :


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GUIDES CERTIFICATE

This is to certify that Mr.DIVAKAR.K student of M.P.BIRLA

INSTITUTE OF MANAGEMENT Associate Bharatiya Vidya

Bhavan, Bangalore, has successfully completed the research work

entitled A Study on relationship of gold and sensex for the

partial fulfilment of the requirements of MASTER OF BUSINESS

ADMINISTRATION degree of BANGALORE UNIVERSITY, undermy guidance and supervision.

Date: Dr. Nagesh S Malavalli

Place: Bangalore (Internal guide)


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ACKNOWLEDGEMENT

I am thankful to Dr. Nagesh malavalli, Principal M.P. Birla

Institute of Management, Bangalore, who has given his valuable

support during the Study and who has guided me to do this

project by giving valuable suggestions and advice.

My gratitude will not be complete without thanking God and I am

most grateful to my beloved parents who have been a constant

source of aspiration and blessings in my pursuit for studies.

Finally, I express my sincere gratitude to all my friends and well

wishers who helped me to do this project

Divakar.K


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CONTENTS

1. Executive Summary

2. Introduction

Gold market in India

Sensex: the barometer of Indian economy

Criteria for Selection and Review of SENSEX

Constituents

Sensex Milestones

3. Literature Review

4. Statement Of Problem

a. Objective of the study

b. Hypothesis

5. Research Methodology

a. Regression analysis

b. Underlying Assumptions

c. Correlation

6. Data Analysis and Interpretation

7. Conclusion

8. Bibliography


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EXECUTIVE SUMMARY

This paper re-examines the relationship between stock prices and one of best

investment considered in India i.e. gold prices for 2006 to 2008 using daily time series

data. The study uses regression analysis ,implementation of regression equation and T

test.

The study looks after the rise of gold market in India. The future of the gold and Gold

price movements are determined by the perception of gold as a `store of value' rather

than its fundamentals as a commodity. The precious metal's value is also determined

by such factors as inflation, interest rates and the presence of lucrative alternative

investment avenues in the economy.

The causal relationship tested between the BSE index and gold prices. Gold price is

included in the model as an additional variable, to examine whether gold price contain

any additional significant information about price movements. Since gold is an

important saving instrument in India and is very often used as a hedge against

inflation, it is expected that gold may be looked upon as alternative asset for those

holding idle money, for speculative purposes.

The study looks to find the relationship effectiveness of the two investments gold

and sensex using regression analysis and equation. And doing T test to find its

significance. The gold prices and the sensex points of the last two years have been

considered to do these tests and find there relationships.

A significant amount of literature now exists that examines the relationship between

stock market returns and a range of macro economic and financial variables over a

number of different stock markets and time periods. Now a days financial economics

provide a number of models that helps to examine the relationship. The return on

stocks is highly sensitive to both fundamentals and expectations. The latter in turn is

influenced by the fundamentals which may be based on either rational or adaptive


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expectation models, as well as by many subjective factors which are unpredictable

and also non quantifiable.

The domestic fundamentals, in principles, are related to domestic macro economic

conditions. However there may be a lot of divergence between the overall state of the

economy and individual stock return. The external factors influencing the stock return

would be stock prices in global economy, the interest rate and the exchange rate.

The term efficiency implies that a financial market incorporates all relevant

information (including macro economic fundamentals) in the market, in which case

the outcome is the best possible under the circumstances . Many empirical studieshave been conducted to examine the relationship between stock price and macro

economic variables and findings are generally mixed. Famma and French (1989) and

Poterba and Summers (1988) have shown that the U.S. stock returns have a mean

reverting tendency and can be predictable to some extent.

This study finds how the sensex and the reliable investment gold are correlated and

the formulas used to find their significance are effective to what extent.

The study has used the data of 27 months from Jan 2006 to March 2008 and has been

analysed after application of different models and found that there does not exists a

significant relationship between gold and sensex during the period of economic

stability and during the economic slow down phase the findings showed that there is

inverse relation between the two investment instruments gold and sensex , as the

sensex slowed down the gold prices began to increase and the models showed that

there exists a statistically significant relationship.


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INTRODUCTION


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Gold market in India

Eternally attractive to mankind, gold has found its principal use as a store of value. Its

beauty has made it popular in decoration. Gold has also become an increasingly

important industrial metal. Because of its rarity and its durability, gold has been

almost universally acceptable as money for thousands of years. Gold is the most

prominent of the noble metals (gold, silver, platinum, and other platinum group

metals), so termed because of their inertness, or reluctance to enter into chemical

reactions. Gold will not react with common acids. Gold, the most famous of all

precious metals, is widely sought after throughout the world for both its investment

qualities and industrial properties.

Indeed, gold traditionally has served three functions: as a monetary instrument, as a

financial asset, and as a raw material primarily used in jewellery and decorative

objects.

As an investment, gold typically is viewed as a financial asset that will maintain its

value during times of political, social, or economic distress. As such, gold can provide

individual and institutional investors alike with a portfolio safety net against sharp

downward spikes in complementary assets such as stocks and bonds. While

investment demand is important, the largest use for gold is in jewellery, with the

majority of use occurring in the United States, Japan, Italy, India, China, and

Thailand. Jewellery production has been growing at a robust pace in the developing

countries of Southeast Asia and the Middle East since 1988. Gold also is used in

electronic connectors and dental alloys.

Gold is mined in more than 76 countries around the world, with the large number of

development projects in these countries expected to keep production growing wellinto the next century. Currently, South Africa is the largest gold producing country,

followed by the United States, Australia, and Canada. Millions of people all over the

world continue to use gold as a hedge against inflation and as a basic form of savings

and a reliable store of value during times of economic uncertainty or political

upheaval.


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Weak dollar drives gold

Gold price movements are determined by the perception of gold as a `store of value'

rather than its fundamentals as a commodity. The precious metal's value is also

determined by such factors as inflation, interest rates and the presence of lucrative

alternative investment avenues in the economy. In the past two years, gold has

regained popularity as a `store of value'. The weakening dollar and the prevailing low

interest rates at the global level have left investors with limited alternative investment

avenues.

The spectre of even a moderate increase in inflation levels, fuelled by the spurt in

commodity prices, would further squeeze the real rate of return on debt investments.

This has forced investors to look for a relatively risk-free investment option. In these

circumstances, there has been a rush towards gold as it is an eternal asset with an

intrinsic value. For long, dollar-denominated instruments were considered the

favourite assets for central banks and institutional investors.

Is gold a golden investment?

Gold and silver have been sought and prized since prehistoric times. They have also

been both a cause of war and a medium of exchange. Gold is the standard by which

the value of anything is assessed; it is universally accepted. Silver does not lag behind

in global trade markets and as an investment. In the code of Menes, an Egyptian ruler

of 3100 BC, it is declared that .one unit of gold is equal to two and- a-half units of

silver in value.. Silver was actually more widely employed as the standard of value

until the nineteenth century.

According to the World Gold Council Report, India stands today as the worlds

largest single market for gold consumption. In developing countries, people have

often trusted gold as a better investment than bonds and stocks. Gold and silver havebeen popular in India because historically these acted as a good hedge against

inflation. In that sense these metals have been more attractive than bank deposits or

gilt-edged securities.


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Despite recent hiccups, gold is an important and popular investment for many

reasons:

In many countries gold remains an integral part of social and religious customs,

besides being the basic form of saving. Shakespeare called it .the saint-seducing gold..

Superstition about the healing powers of gold persists. Ayurvedic medicine in India

recommends gold powder and pills for many ailments.

Gold is indestructible. It does not tarnish and is also not corroded by acid . except by a

mixture of nitric and hydrochloric acids.

Gold has aesthetic appeal. Its beauty recommends it for ornament making above all

other metals.

Gold is so malleable that one ounce of the metal can be beaten into a sheet covering

nearly a hundred square feet.

Gold is so ductile that one ounce of it can be drawn into fifty miles of thin gold wire.

Gold is an excellent conductor of electricity; a microscopic circuit of liquid gold

printed. On a ceramic strip saves miles of wiring in a computer.

Gold is so highly valued that a single smuggler can carry gold worth Rs. 50 lakh

underneath his shirt.

Gold is so dense that all the 90,000 tonnes estimated to have been mined through

history could be transported by one single modern super tanker.

Finally, gold is scam-free. So far, there have been no Mundra-type or Mehta-type

scams in gold.


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Thus, the lure of this yellow metal continues.

On the other hand, it is interesting to note that apart from its aesthetic appeal gold has

no intrinsic value. You cannot eat it, drink it, or even smell it. This aspect of gold

compelled Henry Ford, the founder of Ford Motors, to conclude that .gold is the most

useless thing in the world..

DATA DESCRIPTION

We obtain the aggregate daily gold prices AND RETURNS OF SENSEX, that is,

from January 2005 to Dec 2006 from India Infoline and Equity Master. The Reserve

Bank of India and the Securities Exchange Board of India also provide the data on FII

SENSEX. We look at the relationship between volume and market returns using both,

the returns on the Bombay stock exchange (BSE).. The data on market index is

obtained from the respective stock exchanges.

SENSEX

Established in 1875, BSE is not only the oldest stock exchange in India, but is also the

oldest in Asia. It accounts for over one-third of the total trading volume in the

country. The National Stock Exchange (NSE), located in Bombay, was set up in 1993

to encourage stock exchange reform through system modernization and competition.

It opened for trading in mid-1994. Since then the NSE has made major strides and is

now the dominant stock exchange in the country. Most other studies on Indian market

use the BSE Sensex index to compute market returns. With NSE being an equally

prominent stock exchange in India, we also use the S&P CNX Nifty index to compute

returns.

Between the two exchanges, NSE being demutualized provides a better market

quality. With lower execution cost, lower price volatility and higher liquidity

compared to BSE, NSE has emerged to be superior by providing improved market

quality and high standards of investor protection .


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BSE Sensex is a basket of 30 constituent stocks representing a sample of large, liquid

and representative companies. The base year of SENSEX is 1978-79 and the base

value is 100. The index is widely reported in both domestic and international markets

through print as well as electronic media. The Index was initially calculated based on

the .Fullmarket capitalization. methodology but was shifted to the .Free-float

methodology with effect from September 1, 2003.

SENSEX: THE BAROMETER OF INDIAN ECONOMY

For the premier Stock Exchange that pioneered the stock broking activity in India,

128 years of experience seems to be a proud milestone. A lot has changed since 1875

when 318 persons became members of what today is called "The Stock Exchange,

Mumbai" by paying a princely amount of Re1.Since then, the country's capital

markets have passed through both good and bad periods. The journey in the 20th

century has not been an easy one. Till the decade of eighties, there was no scale to

measure the ups and downs in the Indian stock market. The Stock Exchange, Mumbai

(BSE) in 1986 came out with a stock index that subsequently became the barometer of

the Indian stock market. SENSEX is not only scientifically designed but also based on

globally accepted construction and review methodology. First compiled in 1986,

SENSEX is a basket of 30 constituent stocks representing a sample of large, liquid

and representative companies.

The base year of SENSEX is 1978-79 and the base value is 100. The index is widely

reported in both domestic and international markets through print as well as electronic

media.

The Index was initially calculated based on the "Full Market Capitalization"

methodology but was shifted to the free-float methodology with effect from

September 1, 2003. The "Free-float Market Capitalization" methodology of index

construction is regarded as an industry best practice globally. All major index

providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float

methodology.


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Due to is wide acceptance amongst the Indian investors; SENSEX is regarded to be

the pulse of the Indian stock market. As the oldest index in the country, it provides the

time series data over a fairly long period of time (From 1979 onwards). Small wonder,

the SENSEX has over the years become one of the most prominent brands in the

country.

The growth of equity markets in India has been phenomenal in the decade gone by.

Right from early nineties the stock market witnessed heightened activity in terms of

various bull and bear runs. The SENSEX captured all these events in the most judicial

manner. One can identify the booms and busts of the Indian stock market through

SENSEX.

SENSEX CALCULATION METHODOLOGY

SENSEX is calculated using the "Free-float Market Capitalization" methodology. As

per this methodology, the level of index at any point of time reflects the Free-float

market value of 30 component stocks relative to a base period. The market

capitalization of a company is determined by multiplying the price of its stock by the

number of shares issued by the company. This market capitalization is further

multiplied by the free-float factor to determine the free-float market capitalization.

The base period of SENSEX is 1978-79 and the base value is 100 index points. This

is often indicated by the notation 1978-79=100. The calculation of SENSEX involves

dividing the Free-float market capitalization of 30 companies in the Index by a

number called the Index Divisor. The Divisor is the only link to the original base

period value of the SENSEX. It keeps the Index comparable over time and is the

adjustment point for all Index adjustments arising out of corporate actions,

replacement of scripts etc.

During market hours, prices of the index scrips, at which latest trades are executed,

are used by the trading system to calculate SENSEX every 15 seconds and

disseminated in real time.


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Dollex-30

BSE also calculates a dollar-linked version of SENSEX and historical values of this

index are available since its inception.

Understanding Free-float Methodology Concept:

Free-float Methodology refers to an index construction methodology that takes into

consideration only the free-float market capitalization of a company for the purpose of

index calculation and assigning weight to stocks in Index. Free-float market

capitalization is defined as that proportion of total shares issued by the company that

are readily available for trading in the market. It generally excludes promoters'

holding, government holding, strategic holding and other locked-in shares that willnot come to the market for trading in the normal course. In other words, the market

capitalization of each company in a Free-float index is reduced to the extent of its

readily available shares in the market. In India, BSE pioneered the concept of Free-

float by launching BSE TECK in July 2001 and BANKEX in June 2003. While BSE

TECK Index is a TMT benchmark, BANKEX is positioned as a benchmark for the

banking sector stocks. SENSEX becomes the third index in India to be based on the

globally accepted Free-float Methodology.

Major advantages of Free-float Methodology:

A Free-float index reflects the market trends more rationally as it takes into

consideration only those shares that are available for trading in the market.

Free-float Methodology makes the index more broad-based by reducing the

concentration of top few companies in Index. For example, the concentration of top

five companies in SENSEX has fallen under the free-float scenario thereby making

the SENSEX more diversified and broad-based.

A Free-float index aids both active and passive investing styles. It aids active

managers by enabling them to benchmark their fund returns vis--vis an investable

index. This enables an apple-to-apple comparison thereby facilitating better


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evaluation of performance of active managers. Being a perfectly replicable portfolio

of stocks, a Free-float adjusted index is best suited for the passive managers as it

enables them to track the index with the least tracking error.

Free-float Methodology improves index flexibility in terms of including any stock

from the universe of listed stocks. This improves market coverage and sector

coverage of the index. For example, under a Full-market capitalization methodology,

companies with large market capitalization and low free-float cannot generally be

included in the Index because they tend to distort the index by having an undue

influence on the index movement. However, under the Free-float Methodology, since

only the free-float market capitalization of each company is considered for index

calculation, it becomes possible to include such closely held companies in the index

while at the same time preventing their undue influence

on the index movement.

Globally, the Free-float Methodology of index construction is considered to be an

industry best practice and all major index providers like MSCI, FTSE, S&P and

STOXX have adopted the same. MSCI, a leading global index provider, shifted all its

indices to the Free-float Methodology in 2002. The MSCI India Standard Index,

which is followed by Foreign Institutional Investors (FIIs) to track Indian equities, is

also based on the Free-float Methodology. NASDAQ-100, the underlying index to the

famous Exchange Traded Fund (ETF) - QQQ is based on the Free-float Methodology.

Definition of Free-float:

Share holdings held by investors that would not, in the normal course come into the

open market for trading are treated as 'Controlling/ Strategic Holdings' and hence not

included in free-float. In specific, the following categories of holding are generally

excluded from the definition of Free-float:

Holdings by founders/directors/ acquirers which has control element

Holdings by persons/ bodies with "Controlling Interest"

Government holding as promoter/acquirer

Holdings through the FDI Route


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Strategic stakes by private corporate bodies/ individuals

Equity held by associate/group companies (cross-holdings)

Equity held by Employee Welfare Trusts

Locked-in shares and shares which would not be sold in the open market in normalcourse.

The remaining shareholders would fall under the Free-float category.

Determining Free-float factors of companies:

BSE has designed a Free-float format, which is filled and submitted by all index

companies on a quarterly basis with the Exchange. The Exchange determines the

Freefloat factor for each company based on the detailed information submitted by thecompanies in the prescribed format. Free-float factor is a multiple with which the total

market capitalization of a company is adjusted to arrive at the Free-float market

capitalization. Once the Free-float of a company is determined, it is rounded-off to the

higher multiple of 5 and each company is categorized into one of the 20 bands given

below. A Free-float factor of say 0.55 means that only 55% of the market

capitalization of the company will be considered for index calculation.

Index Closure Algorithm

The closing SENSEX on any trading day is computed taking the weighted average of

all the trades on SENSEX constituents in the last 30 minutes of trading session. If a

SENSEX constituent has not traded in the last 30 minutes, the last traded price is

taken for computation of the Index closure. If a SENSEX constituent has not traded at

all in a day, then its last day's closing price is taken for computation of Index closure.

The use of Index Closure Algorithm prevents any intentional manipulation of the

closing index value.

Maintenance of SENSEX

One of the important aspects of maintaining continuity with the past is to update the

base year average. The base year value adjustment ensures that replacement of stocks


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in Index, additional issue of capital and other corporate announcements like 'rights

issue' etc. do not destroy the historical value of the index. The beauty of maintenance

lies in the fact that adjustments for corporate actions in the Index should not per se

affect the index values.

The Index Cell of the exchange does the day-to-day maintenance of the index within

the road index policy framework set by the Index Committee. The Index Cell ensures

that SENSEX and all the other BSE indices maintain their benchmark properties by

striking a delicate balance between frequent replacements in index and maintaining its

historical continuity. The Index Committee of the Exchange comprises of experts on

capital markets from all major market segments. They include Academicians, Fund-

managers from leading Mutual Funds, Finance-Journalists, Market Participants,

Independent Governing Board members, and Exchange administration.

On-Line Computation of the Index:

During market hours, prices of the index scrips, at which trades are executed, are

automatically used by the trading computer to calculate the SENSEX every 15

seconds and continuously updated on all trading workstations connected to the BSE

trading computer in real time. Adjustment for Bonus, Rights and Newly issued

Capital: The arithmetic calculation involved in calculating SENSEX is simple, but

problem arises when one of the component stocks pays a bonus or issues rights

shares. If no adjustments were made, a discontinuity would arise between the current

value of the index and its previous value despite the non-occurrence of any economic

activity of substance. At the Index Cell of the Exchange, the base value is adjusted,

which is used to alter market capitalization of the component stocks to arrive at the

SENSEX value. The Index Cell of the Exchange keeps a close watch on the events

that might affect the index on a regular basis and carries out daily maintenance of all

the 14 Indices.


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Adjustments for Rights Issues:

When a company, included in the compilation of the index, issues right shares, the

free float market capitalisation of that company is increased by the number of

additional shares issued based on the theoretical (ex-right) price. An offsetting or

proportionate adjustment is then made to the Base Market Capitalisation (see 'Base

Market Capitalisation Adjustment' below).

Adjustments for Bonus Issue:

When a company, included in the compilation of the index, issues bonus shares, the

market capitalisation of that company does not undergo any change. Therefore, there

is no change in the Base Market Capitalisation, only the 'number of shares' in the

formula is updated.

Other Issues:

Base Market Capitalisation Adjustment is required when new shares are issued by

way of conversion of debentures, mergers, spin-offs etc. or when equity is reduced by

way of buy-back of shares, corporate restructuring etc.

Base Market Capitalisation Adjustment:

The formula for adjusting the Base Market Capitalisation is as follows:

New Base Market = Old Base Market X New Market Capitalisation / Old Base

Capitalisation

Criteria for Selection and Review of SENSEX Constituents

The scrip selection and review policy for BSE Indices is based on the objective of:

Improvement

Transparency

Simplicity


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Qualification Criteria:

The general guidelines for selection of constituent scrips in SENSEX are as follows:

A. Quantitative Criteria:

1. Final Rank: The scrip should figure in the top 100 companies listed by Final Rank.

The final rank is arrived at by assigning 75% weightage to the rank on the basis of

six-month average full market capitalisation and 25% weightage to the liquidity rank

based on six-month average daily turnover & six-month average impact cost.

2. Trading Frequency: The scrip should have been traded on each and every trading

day for the last six months. Exceptions can be made for extreme reasons like scrip

suspension etc.

3. Market Capitalization Weightage: The weight of each scrip in SENSEX based on

six-month average Free-Float market capitalisation should be at least 0.5% of the

Index.

4. Industry Representation: Scrip selection would take into account a balanced

representation of the listed companies in the universe of BSE. The index companies

should be leaders in their industry group.

5. Listed History: The scrip should have a listing history of at least 3 months on BSE.

However, the Committee may relax the criteria under exceptional circumstances.


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B. Qualitative Criteria:

Track Record In the opinion of the Committee, the company should have an

acceptable track record.

Index Review Frequency:

The Index Committee meets every quarter to review all BSE indices. However, every

review meeting need not necessarily result in a change in the index constituents. In

case of a revision in the Index constituents, the announcement of the incoming and

outgoing scrips is made six weeks in advance of the actual implementation of the

revision of the Index.

Analysis of Indian stock market BSE Sensex Index

The BSE SENSEX is not only scientifically designed but also based on globally

accepted construction and review methodology. First compiled in 1986, SENSEX is a

basket of 30 constituent stocks representing a sample of large, liquid and

representative companies.

The base year of SENSEX is 1978-79 and the base value is 100. The index is widely

reported in both domestic and international markets through print as well as electronic

media. The Index was initially calculated based on the "Full Market Capitalization"

methodology but was shifted to the free-float methodology with effect from

September 1, 2003. The "Free-float Market Capitalization" methodology of index

construction is regarded as an industry best practice globally. All major index

providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float

methodology. Due to is wide acceptance amongst the Indian investors; SENSEX is

regarded to be the pulse of the Indian stock market. As the oldest index in the country,

it provides the time series data over a fairly long period of time (From 1979 onwards).

Small wonder, the SENSEX has over the years become one of the most prominent

brands in the country.


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History and historical prices of the two investment instruments.

Gold has been known and highly valued since prehistoric times. It may have been the

first metal used by humans and was valued for ornamentation and rituals. Egyptian

hieroglyphs from as early as 2600 BCE describe gold, which king Tushratta of the

Mitanni claimed was as "common as dust" in Egypt. Egypt and Nubia had the

resources to make them major gold-producing.areas.for.much.of.history.

Gold is also mentioned several times in the Old Testament, and is included with the

gifts of the magi in the first chapters of Matthew The south-east corner of the Black

Sea was famed for its gold. Exploitation is said to date from the time of Midas, and

this gold was important in the establishment of what is probably the world's earliest

coinage in Lydia between 643 and 630 BCE.

Gold has long been considered one of the most precious metals, and its value has been

used as the standard for many currencies (known as the gold standard) in history.

Gold has been used as a symbol for purity, value, royalty, and particularly roles that

combine these properties. Gold as a sign of wealth and prestige was made fun of by

Thomas More in his treatise Utopia. On that imaginary island, gold is so abundant that

it is used to make chains or slaves tableware and lavatory-seats.

When ambassadors from other countries arrive, dressed in ostentatious gold jewels

and badges, the Utopians mistake them for menial servants, paying homage instead to

the most modestly-dressed of their party. There is an age-old tradition of biting gold

in order to test its authenticity

Although this is certainly not a professional way of examining gold, the bite test

should score the gold because gold is considered a soft metal according to the Mohs'scale of mineral hardness. The purer the gold the easier it should be to mark it.

Painted lead can cheat this test because lead is softer than gold.

Gold in antiquity was relatively easy to obtain geologically; however, 75% of all gold

ever produced has been extracted since 1910. It has been estimated that all the gold in


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the world that has ever been refined would form a single cube 20 m (66 ft) on a side

(8000 m). During the 19th century, gold rushes occurred whenever large gold

deposits were discovered, including the California, Colorado, Otago, Australia,

Witwatersrand, Black Hills, and Klondike gold rushes.

Gold has a long and complex history. From golds first discovery, it has symbolized

wealth and guaranteed power. Gold has caused obsession in men and nations,

destroyed some cultures and gave power to others.

Archaeological digs suggest the use of Gold began in the Middle East where the first

known civilizations began. The oldest pieces of gold jewelry Egyptian jewelry were

found in the tomb of Queen Zer and that of Queen Pu-abi of Ur in Sumeria and are the

oldest examples found of any kind of jewelry in a find from the third millennium BC.

Over the centuries, most of the Egyptian tombs were raided, but the tomb ofTutankhamen was discovered undisturbed by modern archaeologists. Inside the

largest collection of gold and jewelry in the world was found and included a gold

coffin whose quality showed the advanced state of Egyptian craftsmanship and

goldworking (second millennium BC).

The Persian Empire, in what is now Iran, made frequent use of Gold in artwork as part

of the religion of Zoroastrianism. Persian goldwork is most famous for its animal art,

which was modified after the Arabs conquered the area in the 7th century AD.

When Rome began to flourish, the city attracted talented Gold artisans who created

gold jewelry of wide variety. The use of gold in Rome later expanded into household

items and furniture in the homes of the higher classes. By the third century AD, the

citizens of Rome wore necklaces that contained coins with the image of the emperor.

As Christianity spread through the European continent, Europeans ceased burying

their dead with their jewelry. As a result, few gold items survive from the Middle

Ages, except those of royalty and from church hordes.

In the Americas, the skill of Pre-Columbian cultures in the use of Gold was highly

advanced long before the arrival of the Spanish. Indian goldsmiths had mastered most

of the techniques known by their European contemporaries when the Spanish arrived.


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They were adept at filigree, granulation, pressing and hammering, inlay and lost-wax

methods. The Spanish conquerors melted down most of the gold that they took from

the peoples of this region and most of the remaining examples have come from

modern excavations of grave sites. The greatest deposits of gold from these times

were in the Andes and in Columbia.

During the frontier days of the United States news of the discovery of gold in a region

could result in thousands of new settlers, many risking their lives to find gold. Gold

rushes occurred in many of the Western States, the most famous occuring in

California at Sutters Mill in 1848. Elsewhere, gold rushes happened in Australia in

1851, South Africa in 1884 and in Canada in 1897.

The rise of a gold standard was meant to stabilize the global economy, dictating that a

nation must limit its issued currency to the amount of gold it held in reserve. Great

Britain was the first to adopt the gold standard in 1821, followed, in the 1870s, by the

rest of Europe followed. The system remained in effect until the end of the first world

war, after which the US was the only country still honoring the Gold Standard. After

the war, other countries were allowed to keep reserves of major currencies instead of

gold. The arrival of the great depression marked the end of the U.S. export of gold in

the 1930s. By mid 20th century, the US dollar had replaced gold in international

trade.

The American Eagle Bullion program was launched in 1986 with the sale of gold and

silver bullion coins. Platinum was added to the American Eagle Bullion family in

1997. A bullion coin is a coin that is valued by its weight in a specific precious metal.


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Historical prices of gold from 1893 to 2005

HISTORICAL PRICES OF GOLD FOR THE LAST 20 YEARS

20 YEAR GOLD PRICES

YEAR Rs Per 10 Grams

1988 1,929.260

1989 2,250.804

1990 3,406.000

1991 2,893.891

1992 2,572.347

1993 3,858.521


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1994 4,180.064

1995 4,799.000

1996 4,658.000

1997 5,713.000

1998 4,750.000

1999 4,050.000

2000 4,220.000

2001 4,395.000

2002 4,410.000

2003 5,030.000

2004 5,787.781

2005 6,430.868

2006 9,646.302

2007 8,681.672

SENSEX MILESTONES

Rise of the Sensex through Indian stock market history.

1000, July 25, 1990 - On July 25, 1990, the Sensex touched the four-digit figure for

the first time and closed at 1,001 in the wake of a good monsoon and excellent

corporate results.

2000, January 15, 1992 - On January 15, 1992, the Sensex crossed the 2,000-mark

and closed at 2,020 followed by the liberal economic policy initiatives undertaken by

the then finance minister and current Prime Minister Dr Manmohan Singh.

3000, February 29, 1992 - On February 29, 1992, the Sensex surged past the 3000

mark in the wake of the market-friendly Budget announced by the then Finance

Minister, Dr Manmohan Singh.


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4000, March 30, 1992 - On March 30, 1992, the Sensex crossed the 4,000-mark and

closed at 4,091 on the expectations of a liberal export-import policy. It was then that

the Harshad Mehta scam hit the markets and Sensex witnessed unabated selling.

5000, October 11, 1999 - On October 8, 1999, the Sensex crossed the 5,000-mark asthe BJP-led coalition won the majority in the 13th Lok Sabha election.

6000, February 11, 2000 - On February 11, 2000, the infotech boom helped the

Sensex to cross the 6,000-mark and hit and all time high of 6,006.

7000, June 21, 2005 - On June 20, 2005, the news of the settlement between the

Ambani brothers boosted investor sentiments and the scrips of RIL, Reliance Energy,

Reliance Capital and IPCL made huge gains. This helped the Sensex crossed 7,000points for the first time.

8000, September 8, 2005 - On September 8, 2005, the Bombay Stock Exchange's

benchmark 30-share index -- the Sensex -- crossed the 8000 level following brisk

buying by foreign and domestic funds in early trading.

9000, December 09, 2005 - The Sensex on November 28, 2005 crossed 9000 to

touch 9000.32 points during mid-session at the Bombay Stock Exchange on the back

of frantic buying spree by foreign institutional investors and well supported by local

operators as well as retail investors.

10,000, February 7, 2006 - The Sensex on February 6, 2006 touched 10,003 points

during mid-session. The Sensex finally closed above the 10K-mark on February 7,

2006.

11,000, March 27, 2006 - The Sensex on March 21, 2006 crossed 11,000 and

touched a peak of 11,001 points during mid-session at the Bombay Stock Exchange

for the first time. However, it was on March 27, 2006 that the Sensex first closed at

over 11,000 points.


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12,000, April 20, 2006 - The Sensex on April 20, 2006 crossed 12,000 and touched a

peak of 12,004 points during mid-session at the Bombay Stock Exchange for the first

time.

13,000, October 30, 2006 - The Sensex on October 30, 2006 crossed 13,000 and stillriding high at the Bombay Stock Exchange for the first time. It took 135 days to reach

13,000 from 12,000. And 124 days to reach 13,000 from 12,500. On 30th October

2006 it touched a peak of 13,039.36 & closed at 13,024.26.

14,000, December 5, 2006 - The Sensex on December 5, 2006 crossed 14,000 and

touched a peak of 14028 at 9.58AM(IST) while opening for the day December 5,

2006.

15,000, July 6, 2007- The Sensex on July 6, 2007 crossed another milestone and

reached a magic figure of 15,000. it took almost 7 month and 1 day to touch such a

historic milestone.

16,000, September 19, 2007- The Sensex on September 19, 2007 crossed the 16,000

mark and reached a historic peak of 16322 while closing. The bull hits because of the

rate cut of 50 bps in the discount rate by the Fed chief Ben Bernanke in US.

17,000, September 26, 2007- The Sensex on September 26, 2007 crossed the 17,000

mark for the first time, creating a record for the second fastest 1000 point gain in just

5 trading sessions. It failed however to sustain the momentum and closed below

17000. The Sensex closed above 17000 for the first time on the following day.

Reliance group has been the main contributor in this bull run, contributing 256 points.

This also helped Mukesh Ambani's net worth to grow to over $50 billion or Rs.2

trillion. It was also during this record bull run that the Sensex for the first time

zoomed ahead of the Nikkei of Japan.

18,000, October 9, 2007- The Sensex crossed the 18k mark for the first time on

October 9, 2007. The journey from 17k to 18k took just 8 trading sessions which is

the third fastest 1000 point rise in the history of the sensex. The sensex closed at


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18,280 at the end of day. This 788 point gain on 9th October was the second biggest

single day absolute gains.

19,000, October 15, 2007- The Sensex crossed the 19k mark for the first time on

October 15th 2007. It took just 4 days to reach from 18k to 19k. This is the fastest1000 points rally ever and also the 640 point rally was the second highest single day

rally in absolute terms. This made it a record 3000 point rally in 17 trading sessions

overall.

20,000, October 29, 2007- The Sensex crossed the 20k mark for the first time with a

massive 734.5 point gain but closed below the 20k mark. It took 11 days to reach

from 19k to 20k. The journey of the last 10,000 points was covered in just 869

sessions as against 7,297 sessions taken to touch the 10,000 mark from 1,000 levels.In 2007 alone, there were six 1,000-point rallies for the Sensex.

Major crashes since 2000

May 2006

On May 22, 2006, the Sensex plunged by 1100 points during intra-day trading,

leading to the suspension of trading for the first time since May 17, 2004. The

volatility of the Sensex had caused investors to lose Rs 6 lakh crore ($131 billion)

within seven trading sessions. The Finance Minister of India, P. Chidambaram, made

an unscheduled press statement when trading was suspended to assure investors that

nothing was wrong with the fundamentals of the economy, and advised retail

investors to stay invested. When trading resumed after the reassurances of the Reserve

Bank of India and the Securities and Exchange Board of India (SEBI), the Sensex

managed to move up 700 points, still 450 points in the red.

The Sensex eventually recovered from the volatility, and on October 16, 2006, the

Sensex closed at an all-time high of 12,928.18 with an intra-day high of 12,953.76.

This was a result of increased confidence in the economy and reports that India's

manufacturing sector grew by 11.1% in August 2006.


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Effects of the subprime crisis in the US

On July 23, 2007, the Sensex touched a new high of 15,733 points. On July 27, 2007

the Sensex witnessed a huge correction because of selling by Foreign Institutional

Investors and global cues to come back to 15,160 points by noon. Following global

cues and heavy selling in the international markets, the BSE Sensex fell by 615 points

in a singleday on August 1, 2007.

Early 2000 recession

The Early 2000s recession was felt in mostly Western countries, affecting the

European Union mostly during 2000 and 2001 and the United States mostly in 2002

and 2003. Canada and Australia avoided the recession for the most part, while Russia,

a nation that did not experience prosperity during the 1990s, began to recover.

Japan's 1990s recession continued. The Early 2000s recession had been predicted by

economists for years, because the boom of the 1990s, which was accompanied by

both low inflation and low unemployment, had already ceased in East Asia during that

region's 1997 economic crisis. The 1990s were also a period of recession between

1995 and 1998 inclusive. The Early 2000s recession was not as bad as many predicted

it would be, nor was it as bad as either of the two previous world-wide recessions.

United States

The U.S. economy shrank in three non-consecutive quarters in the early 2000s (the

third quarter of 2000, the first quarter of 2001, and the third quarter of 2001).

According to the National Bureau of Economic Research (NBER), which is the

private, nonprofit, nonpartisan organization charged with determining economic

recessions, the U.S. economy was in recession from March 2001 to November 2001, a

period of eight months. However, economic conditions did not satisfy the common

shorthand definition of recession, which is "a fall of a country's real gross domestic


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product in two or more successive quarters," and has led to some confusion about the

procedure for determining the starting and ending dates of a recession.

The NBER's Business Cycle Dating Committee (BCDC) uses monthly, rather than

quarterly, indicators to determine peaks and troughs in business activity, as can be

seen by noting that starting and ending dates are given by month and year, not

quarters. However, controversy over the precise dates of the recession led to the

characterization of the recession as the "Clinton Recession" by Republicans, if it

could be traced to the final term of President Bill Clinton.

European Union

Transition left the economy of the European Union in a cautiously optimistic stateduring the early 2000s. The most difficult years were 2000-2001, precipitating the

worst years of the American recession. The European Union introduced a new

currency on January 1, 1999. The euro, which was met with much anticipation, had its

value immediately plummet, and it continued to be a weak currency throughout 2000

and 2001. Inflation struck the Eurozone for a few months in summer 2001 but the

economy deflated within months. In 2002, the value of the euro began to rapidly rise

(reaching parity with the US Dollar on July 15, 2002). This hurt business for

companies based in Europe, as the profits made abroad (especially in the Americas)

had an unfavorable exchange rate.

Canada

Canada's economy is closely linked to that of the United States, and economic

conditions south of the border tend to quickly make their way north. Canada's stock

markets were especially hard hit by the collapse in high-tech stocks. For much of the

1990s the rapid rise of the TSX had almost wholly been attributed to two stocks:

Nortel and BCE. Both companies were hard hit by the downturn, especially Nortel,

which was forced to lay off much of its workforce. The events of September 11th also

hurt the Canadian stock markets and were especially devastating to the already

troubled airline sector.


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However in the wider economy Canada was surprisingly unhurt by these events.

While growth slowed, the economy never actually entered a recession. This was the

first time that Canada had avoided following the United States into an economic

downturn. The rate of job creation in Canada continued at the rapid pace of the 1990s.

A number of explanations have been advanced to explain this. Canada was not as

directly affected by 9/11 and the subsequent wars, and the downward pressure of

these events was more muted. Canada's fiscal management during the period has been

praised as the federal government continued to bring in large surpluses throughout

this period, in sharp contrast to the United States.

Unlike the United States no major tax cuts or major new expenditures were

introduced. However, during this time, Canada did pursue an expansionary monetary

policy in an effort to reduce the effects of a possible recession.

Participatory notes issue

On October 16, 2007, SEBI (Securities & Exchange Board of India) proposed curbs

on participatory notes which accounted for roughly 50% of FII investment in 2007.

SEBI was not happy with P-notes because it was not possible to know who owned the

underlying securities, and hedge funds acting through P-notes might therefore cause

volatility in the Indian markets.

However the proposals of SEBI were not clear and this led to a knee-jerk crash when

the markets opened on the following day (October 17, 2007). Within a minute of

opening trade, the Sensex crashed by 1744 points or about 9% of its value - the

biggest intra-day fall in Indian stock markets in absolute terms till then. This led to

automatic suspension of trade for 1 hour. Finance Minister P. Chidambaram issued

clarifications, in the meantime, that the government was not against FIIs and was not

immediately banning PNs.

After the market opened at 10:55 AM, the index staged a comeback and ended the day

at 18715.82, down 336.04 from the last day's close. This was, however not the end of

the volatility. The next day (October 18, 2007), the Sensex tumbled by 717.43 points

3.83 per cent to 17998.39. The slide continued the next day when the Sensex


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fell 438.41 points to settle at 17559.98 at the end of the week, after touching the

lowest level of that week at 17226.18 during the day.

After detailed clarifications from the SEBI chief M. Damodaran regarding the new

rules, the market made a 879-point gain on October 23, thus signalling the end of the

PN crisis.

January 2008

In the third week of January 2008, the Sensex experienced huge falls along with other

markets around the world. On 21 January 2008, the Sensex saw its highest ever loss

of 1,408 points at the end of the session. The Sensex recovered to close at 17,605.40

after it tumbled to the day's low of 16,963.96, on high volatility as investors panicked

following weak global cues amid fears of a recession in the US.

The next day, the BSE Sensex index went into a free fall. The index hit the lower

circuit breaker in barely a minute after the markets opened at 10 AM. Trading was

suspended for an hour. On reopening at 10.55 AM IST, the market saw its biggest

intra-day fall when it hit a low of 15,332, down 2,273 points. However, after

reassurance from the Finance Minister of India, the market bounced back to close at

16,730 with a loss of 875 points.

Over the course of two days, the BSE Sensex in India dropped from 19,013 on

Monday morning to 16,730 by Tuesday evening or a two day fall of 13.9%.[2]


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Companies in the Sensex

List of BSE Sensex companies provides the full list of companies that have been part

of the BSE Sensex since its inception in 1986 (baselined to 1979). (as of October 31,

2007)

CODE NAME SECTOR

ADJ

FAC

500410 ACC Housing Related 0.60

500425 Ambuja Cements Ltd Housing Related 0.65

500490 Bajaj Auto Transport Equipments 0.65

500103 BHEL Capital Goods 0.35

532454 Bharti Airtel Telecom 0.35

500087 Cipla Healthcare 0.65

500124 DLF Ltd** Construction 0.75

532868 Grasim Industries Diversified 0.75

500010 HDFC Finance 0.90

500180 HDFC Bank Finance 0.80

500440 Hindalco Industries Metal, Metal Products & Mining 0.70

500696 Hindustan Lever Limited FMCG 0.70

532174 ICICI Bank Finance 1.00

500209 Infosys Information Technology 0.85

500875 ITC Limited FMCG 0.70

500510 Larsen & Toubro Capital Goods & Construction. 0.90

500520 Mahindra & Mahindra Transport Equipments 0.80


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Limited

532500 Maruti Udyog Transport Equipments 0.45

532555 NTPC Power 0.15

500312 ONGC Oil & Gas 0.20

500359 Ranbaxy Laboratories Healthcare 0.70

532712 Reliance Communications Telecom 0.35

500390 Reliance Energy Power 0.70

500325 Reliance Industries Oil & Gas 0.50

500376 Satyam Computer Services Information Technology 0.95

500112 State Bank of India Banking & Finance 0.45

532540 Tata Consultancy Services Information Technology 0.20

500570 Tata Motors Transport Equipments 0.60

500470 Tata Steel Metal, Metal Products & Mining 0.70

507685 Wipro Information Technology 0.20


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Sensex falls

The top ten single-day falls of the Sensex has occurred on the following dates

Jan 21, 2008 --- 1,408.35 points

Mar 17, 2008 --- 951.03 points

Jan 22, 2008 --- 857 points

Feb 11, 2008 --- 833.98 points

May 18, 2006 --- 826 points

Mar 13, 2008 --- 770.63 points

Dec 17, 2007 --- 769.48 points

Mar 31, 2007 --- 726.85 points

Oct 17, 2007 --- 717.43 points

Jan 18, 2007 --- 687.82 points

Nov 21, 2007 --- 678.18 points

Aug 16, 2007 --- 642.70 points

Apr 2, 2007 --- 616.73 points

Statement of problem

Find the relationship between the two investment vehicle , that is the sensex and the

most reliable gold. To know how these two investment react during different phases

of economy. What kind of economic life cycles makes people invest more in any one

of these investment vehicle.

Objective of the study

To analyse the growth and see whether a statistical relationship exists between the

sensex and gold. And use different models for testing the relationship significance.


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SCOPE OF STUDY

The data considered for the project is for the last 27 months from January 2006 to

March 2008. The data used has been taken from Multi commodity index of India ,

BSE and Yahoo Finance. The last 27 month Points of Sensex and Prices of gold has

been used.

Hypothesis

Null Hypothesis - The relationship between the sensex and gold over the time is

significant.

Alternate Hypothesis- The relationship between the sensex and gold over the time is

not

Significant.

Method of analysis

Regression analysis, coefficient of correlation, hypothesis testing have been used for

the study.


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REVIEW OF LITERATURE


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REVIEW OF LITERATURE

A significant amount of literature now exists that examines the relationship between

stock market returns and a range of macro economic and financial variables over a

number of different stock markets and time periods. Now a days financial economics

provide a number of models that helps to examine the relationship. The return on

stocks is highly sensitive to both fundamentals and expectations. The latter in turn is

influenced by the fundamentals which may be based on either rational or adaptive

expectation models, as well as by many subjective factors which are unpredictable

and also non quantifiable.

Empirical studies indicate that once the financial deregulation takes place, the stock

market becomes more sensitive to both domestic and external factors. The domestic

fundamentals, in principles, are related to domestic macro economic conditions.

However there may be a lot of divergence between the overall state of the economy

and individual stock return. The external factors influencing the stock return would be

stock prices in global economy, the interest rate and the exchange rate. The early

survey on the behaviour of stock return was done by Famma(1970). The Famma

Theory of efficient market hypothesis suggests that stock markets are efficient

because they reflect the fundamental macro economic behavior.

The term efficiency implies that a financial market incorporates all relevant

information (including macro economic fundamentals) in the market, in which case

the outcome is the best possible under the circumstances . Many empirical studies

have been conducted to examine the relationship between stock price and macro

economic variables and findings are generally mixed. Famma and French (1989) and

Poterba and Summers (1988) have shown that the U.S. stock returns have a mean

reverting tendency and can be predictable to some extent .


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Similar results have been found by MacDonald and Power (1991) that U.K. stock

returns have a mean reverting-tendency and so can be predicted. Subsequent studies

like Famma(1981), Famma and Gibbons(1982) Summers(1986) and Chen(1991)

verified that the efficient market hypothesis holds in US market, and there was

significant linkage between US stock market on one hand and real economic

variables, such as, GDP, industrial production, inflation and unemployment on the

other hand.

Naj and Rahman(1991) studied the relationship between volatility of stock return and

of macroeconomic variables in four developed countries and confirmed the

relationships Fang and Lee(1990) studied the long term relationships between stock

return on the one hand and GNP, inflation and money supply on the other in Taiwan

and concluded that the efficient market hypothesis is not valid for an emerging

market.

The behavior of stock price (BSE) in relation to some key macro economic variables

in India during the scam period 1992 was studied by Bhattacharya and Chakravarty

(1994). Their dynamic forecasts indicate that the behavior of stock price is unrelated

to key macro variables.

Mukherjee and Naka(1995) explored the relationship between exchange rate,

inflation , money supply, real economic activity, long term government bond rate and

call money rate with the Japanese stock market . The results also suggested the role of

government in terms of fiscal and monetary policy in smooth functioning of the stock

market is crucial in this region.

In Indian context , Bhattacharya and Mukherjee (2002) studied the nature of the

causal relationship between stock prices and macro aggregates in India by using the

methodology proposed by Toda and Yamamoto for the period of 1992-93 to 2000-

2001.Their results show that there is no causal relationship between stock price and

macro economic variables like money supply, national income and interest rate but

there exists a two way causation between stock price and rate of inflation. According

to them index of industrial production lead the stock price.


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Mishra (2004) examined the relationship between stock market and foreign exchange

markets .They used monthly data for stock return exchange rate, interest rate and

demand for money for the period 1992 to 2002. The study found that there exists a

unidirectional causality between the exchange rate and interest rate and also between

the exchange rate return and demand for money. The study also suggested that there is

no Granger causality between the exchange rate return and stock return.

Gold shares or gold bullion which is the better investment.

( J F AFFLECK GRAVE )

The relative merits of investment in gold stock and gold stocks . Finding the

relationship with each other.The data used in this study comprised the weekly closing

prices of 47 gold shares.

Conclusion

Relative to gold shares , gold bullion has proved historically to be a poor investment.

The relationship between the stocks and gold has been significant.


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RESEARCH METHODOLOGY


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RESEARCH METHODOLOGY

Regression analysis

Regression analysis is a technique used for the modeling and analysis of numerical

data consisting of values of a dependent variable (response variable) and of one or

more independent variables (explanatory variables). The dependent variable in the

regression equation is modeled as a function of the independent variables,

corresponding parameters ("constants"), and an error term. The error term is treated as

a random variable. It represents unexplained variation in the dependent variable. The

parameters are estimated so as to give a "best fit" of the data. Most commonly the best

fit is evaluated by using the least squares method, but other criteria have also been

used.

Data modeling can be used without there being any knowledge about the underlying

processes that have generated the data, in this case the model is an empirical model.

Moreover, in modelling knowledge of the probability distribution of the errors is not

required. Regression analysis requires assumptions to be made regarding probability

distribution of the errors. Statistical tests are made on the basis of these assumptions.

In regression analysis the term "model" embraces both the function used to model the

data and the assumptions concerning probability distributions.

Regression can be used for prediction (including forecasting of time-series data),

inference, hypothesis testing, and modeling of causal relationships. These uses of

regression rely heavily on the underlying assumptions being satisfied. Regression

analysis has been criticized as being misused for these purposes in many cases where

the appropriate assumptions cannot be verified to hold.One factor contributing to the

misuse of regression is that it can take considerably more skill to critique a model

than to fit a model.


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UNDERLYING ASSUMPTIONS

The sample must be representative of the population for the inference prediction. The

dependent variable is subject to error. This error is assumed to be a random variable,

with a mean of zero. Systematic error may be present but its treatment is outside thescope of regression analysis.

The independent variable is error-free. If this is not so, modeling should be done using

Errors-in-variables model techniques.

The predictors must be linearly independent, i.e. it must not be possible to express any

predictor as a linear combination of the others. See Multicollinear.

The errors are uncorrelated, that is, the variance-covariance matrix of the errors is

diagonal and each non-zero element is the variance of the error.

The variance of the error is constant (homoscedasticity). If not, weights should be

used. The errors follow a normal distribution. If not, the generalized linear model

should be used.

Correlation

In probability theory and statistics, correlation, (often measured as a correlation

coefficient) , indicates the strength and direction of a linear relationship between two

random variables. In general statistical usage, correlation or co-relation refers to the

departure of two variables from independence. In this broad sense there are several

coefficients, measuring the degree of correlation, adapted to the nature of data.

A number of different coefficients are used for different situations. The best known is

the Pearson product-moment correlation coefficient, which is obtained by dividing the

covariance of the two variables by the product of their standard deviations. Despite its

name, it was first introduced by Francis Galton.

The correlation coefficient X, Y between two random variables Xand Ywith expected

values Xand Yand standard deviations Xand Y is defined as:


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where E is the expected value operator and cov means covariance. Since X =

E(X), X2

= E(X2

) E2

(X) and likewise forY, we may also write

The correlation is defined only if both of the standard deviations are finite and both of

them are nonzero. It is a corollary of the Cauchy-Schwarz inequality that the

correlation cannot exceed 1 in absolute value.

The correlation is 1 in the case of an increasing linear relationship, 1 in the case of a

decreasing linear relationship, and some value in between in all other cases, indicating

the degree of linear dependence between the variables. The closer the coefficient is to

either1 or 1, the stronger the correlation between the variables.

If the variables are independent then the correlation is 0, but the converse is not true

because the correlation coefficient detects only linear dependencies between two

variables. Here is an example: Suppose the random variable Xis uniformly distributed

on the interval from 1 to 1, and Y= X2. Then Y is completely determined by X, so

that Xand Yare dependent, but their correlation is zero; they are uncorrelated.

T tests

A t-test is any statistical hypothesis test in which the test statistic has a Student's t

distribution if the null hypothesis is true. It is applied when sample sizes are smallenough that using an assumption of normality and the associated z-test leads to

incorrect inference.


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Calculations

Independent one-sample t-test

This equation is used to compare one sample mean to a specific value 0.

Where s is the grand standard deviation of the sample. n is the sample size. The

degrees of freedom used in this test is n 1.

Independent two-sample t-test

Equal sample sizes

This equation is only used when the two sample sizes (that is, the n or number of

participants of each group) are equal.

Where s is the grand standard deviation (or pooled standard deviation), 1 = group one,

2 = group two. The denominator is the standard error of the difference between two

means. For significance testing, the degrees of freedom for this test is 2 n 2 where n

= # of participants in each group.


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PAIRED T- TEST

This function gives a paired Student t test, confidence intervals for the difference between

a pair of means and, optionally, limits of agreement for a pair of samples.

The paired t test provides an hypothesis test of the difference between population means

for a pair of random samples whose differences are approximately normally distributed.

Please note that a pair of samples, each of which are not from normal a distribution, often

yields differences that are normally distributed.

The test statistic is calculated as:

where d bar is the mean difference, s is the sample variance, n is the sample size and

t is a Student t quantile with n-1 degrees of freedom.

Power is calculated as the power achieved with the given sample size and variance for

detecting the observed mean difference with a two-sided type I error probability of

(100-CI%)%.


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DATA ANALYSIS


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DATA ANALYSIS: Data -Sensex points and Gold prices

From January 2006 to October 2007

Months from 2006 to 2007 sensex gold

Jan 9,919.89 7847

Feb 10,370.24 8298

Mar 11,279.96 8158

Apr 11,851.93 8745

May 10,398.61 10181

Jun 10,609.25 9713

Jul 10,743.88 9781

Aug 11,699.05 10113

Sep 12,454.42 9969

Oct 12,961.90 8930

Nov 13,696.31 9286

Dec 13,786.91 9335

Jan 14,090.92 8841

Feb 12,938.09 9744

Mar 13,072.10 9721

Apr 13,872.37 9853

May 14,544.46 9559

Jun 14,650.51 9243

Jul 15,550.99 8953

Aug 15,318.60 9023

Sep 17,291.10 9362

oct 19,837.99 9513


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The sensex points and gold prices movement from January 2006 to

October 2007

Movement of sensex and gold

0.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

j

an

m

ar

m

ay

jul

s

ep

n

ov

j

an

m

ar

m

ay

jul

s

ep

Months

P

o

in

ts

o

r

R

u

e

e

s

sensex

gold


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Regression analysis of the above data.

SUMMARYOUTPUT

Regression Statistics

Multiple R 0.140851365

R Square 0.019839107

Adjusted R Square -0.029168938

Standard Error 2468.769817

Observations 22

ANOVA

df SS MS F Significance F

Regression 1 2467265.833 2467265.833 0.404813276 0.531828493

Residual 20 121896488.2 6094824.408

Total 21 124363754

Coefficients StandardError t Stat P-value

Intercept 8180.312651 7945.490627 1.029554125 0.315510282

X Variable 1 0.543535724 0.854280946 0.636249382 0.531828493

INTERPRITATION

Multiple R - The co-efficient of correlation between sensex points and gold prices

Rs per 10 grams of gold)

R-Square - The co-efficient of determination is equal to the regression sum of

squares divided by the total sum of squares. The co-efficient of determination

measures the proportion of variation in gold that is explained by the independent

variable sensex in the regression model.

Therefore, 1.98%of the variation in gold prices can be explained by the variability

in the sensex

Lower 95% Upper 95% Lower 95.0% Upper 95.0%

-8393.690319 24754.31562 -8393.690319 24754.31562

-1.238463099 2.325534546 -1.238463099 2.325534546


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Standard error - The SE or the estimate represents a measure of the variation around

the regression line.

Regression - The regression sum of squares is equal to the sum of the squared

differences between the predicted value of gold and the average value of gold.

Residual - The error sum of squares represents the part of the variation in gold

that is not explained by the regression. It is based on the difference between actual

prices of gold and calculated value of gold.

From above we can come to a conclusion that the relation between the two investment

instruments sensex and gold is not significant for the period January 2006 to October

2007. The correlation between sensex and gold is poor and its hard to determine

whether a statistically significant relationship exists between the two .

The R square is only 1.98%, that is only 1.98% of the variation in gold prices can be

explained by the sensex values .

Therefore the null hypothesis is rejected and the alternative hypothesis that the sensex

and gold does not have a significant relationship during this time period is accepted.

From the above graph we can find during this time period , even when the sensex is

moving and gaining points the gold price movement is been constant. The movement

of the sensex points has no effect on gold prices.


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DURING THE WORLD ECONOMIC SLOW DOWN PERIOD(RECESSION)

THE TIME PERIOD NOVEMBER 2007 TO MARCH 2008

Nov 2007 to March 2008 SENSEX GOLD

November 19,363.19 10487December 20,286.99 10134January 17,648.71 11319February 7,578.72 11842March 15,644.44 12792

Movement of sensex and gold

0.00

5,000.00

10,000.00

15,000.00

20,000.00

25,000.00

nov dec jan feb mar

Months

PointsorRupees

sensex

gold


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REGRESSION ANALYSIS FOR THE ABOVE DATA

SUMMARYOUTPUT

Regression Statistics

Multiple R 0.984892717

R Square 0.970013663

Adjusted R Square 0.960018218

Standard Error 358.8562332

Observations 5

ANOVA

df SS MS F Significance F

Regression 1 12497314.02 12497314.02 97.04557 0.002223959

Residual 3 386333.3884 128777.7961Total 4 12883647.41

CoefficientsStandardError t Stat P-value

Lower95%

Upper95%

Intercept 36877.922 1912.4593 19.28298 0.0003046 30791.62 42964.22X Variable1 -1.6591997 0.1684266 -9.85117 0.002224 -2.19521 -1.12319

Lower 95.0% Upper 95.0%

30791.62 42964.22

-2.19521 -1.12319


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T tests- For the same time period.

Data

Months x y ( existing) calculated y value

sensex gold

Nov 19,363.19 10487 10,584.71

Dec 20,286.99 10134 10,048.90

Jan 17,648.71 11319 11,579.11

Feb 17,578.72 11842 11,619.70

Mar 15,644.44 12792 12,741.58

Averages 18,104.41 11314.8

byx -0.58

The regression equation for calculated y = -0.58*(I9-18104.41) +11314.8


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T test

t-Test: Paired Two Sample for Means

Variable 1 Variable 2

Mean 11314.8 11314.8

Variance 1134904.7 1083514.747

Observations 5 5

Pearson Correlation 0.984892717

Hypothesized Mean Difference 0

df 4

t Stat 1.32156E-14

P(T


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INTERPRITATION

From above we can know that the relation between the two investment instrumentssensex and gold is significant for the period November 2007 to March 2008. Thecorrelation between sensex and gold is good and we can determine a statisticallysignificant relationship between the two.

The R square is high, that is 97% of the variation in gold prices can be explained bythe sensex values.

Therefore the null hypothesis is accepted here, that is the two investment instrumentssensex and golds relationship is a significant one and the alternative hypothesis isrejected.

From the above graph we can find during this time period, when the sensex points ismoving down the gold prices are gaining .The gold prices are moving higher as thesensex points are dropping down.

The coefficient of correlation between gold and sensex is more than 98%, it showsthese two are strongly correlated.

The period between November 2007 and March 2008 is considered to be the period ofthe economic slow down period or to be recession period . During this period thesensex has gone down and the gold prices have gone up , which indicates a inverserelationship between these two.

The t test also determines that during Nov 2007 and Mar 2008 the sensex and goldshows inverse relation. The probability P = O.5 is lesser than the T critical range.

Thus there exists a significant relationship between the sensex points movements andtheprice movements of gold and are inversely related during this particular timeperiod , where the economy is slowing down world wide.


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CONCLUSION


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CONCLUSION

This paper has attempted to study the existence of relationship between

Sensex and gold. This study is limited to a period of 27 months due to non availability

of resources. The data that was collected has been processed with the help of

regression, correlation. The data had been divided into two parts according to the

economic situation. First 22 months of the data has been considered as the period of

economic stability ( during January 2006 and October 2007 ) and the last 5 months is

of the period of economic slow down or to be recession period ( from November 2007

to March 2008)

The processed data of the first part showed that the fluctuating movement of

stocks through the time period did not have its effect on the compared investment

gold. That is the prices of gold did not have much recognizable changes when the

sensex moved up. The models used showed that the relationship between gold and

stocks was not significant during that time period , the time period where the

economy was more stable.

While the second part of the data contradicts the results of the first 22 months.

The data here considered is of the 5 months of the economy slow down period ( from

Nov 2007 to Mar 2008) . Here the data which was processed with different models

showed that there exists a statistically significant relation between the two investment

instruments.

The price movement has a inverse relation and when the sensex began to lose

points because of the recession the gold prices have increased.

Here we can say that during the uncertain conditions in the economy , people

have chosen the less risky investment gold . This may be due to hedging were the

risks of staying invested in one asset will be decreased by investing the same money

into risk less assets .

As gold has been a preferred investment as it is the one of the oldest and

reliable form of investment.


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During that time period there were talks about recession happening in U.S

(SUB PRIME CRISES) , as it is a economically stronger country and influences other

economically power full countries,

Documents

Relationship Between Gold Price & Sensex