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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 Price35 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 Gold54 4.6 Annualized volatility of Stock and Gold .55

Chapter 5 : Conclusion .56



S. No.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Data selection criteria

Table Name

Page No. 33 35 37 38 39 40 45 46 47 48 49 54 55

Descriptive Statistics of Indices Stock Indices Movement Descriptive Statistics of Gold Gold Price Movement Stock Index and Gold Descriptive statistics of Stock Index Monthly Returns Stock Monthly Returns Descriptive statistics Gold Price Monthly Returns Gold Monthly Returns Stock Returns and Gold Returns Annual Returns on Stock and Gold Annualized Volatility of Stock and Gold

S. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 BSE Index chart DJIA Index chart FTSE 100 Index chart NIKKEI 225 Index chart Gold Price (INR) Gold Price (USD) Gold Price (GBP) Gold Price (JPY) Market timings Stock Indices Box Plot Gold Price Box Plot DJIA Trend Lines Gold (USD) Trend Lines BSE Trend Lines Gold (INR) Trend Lines FTSE 100 Trend Lines Gold (GBP) Trend Lines NIKKEI Trend Lines Gold (JPY) Trend Lines Stock volatility box plot Gold price volatility box plot DJIA Volatility Trend Line Gold (USD) Volatility Trend BSE Volatility Trend Line Gold (INR) Volatility Trend FTSE 100 Volatility Trend Line Gold (GBP) Volatility Trend NIKKEI Volatility Trend Line Gold (JPY) Volatility Trend Figure Name Page No. 14 14 15 15 24 24 25 25 32 36 38 41 41 42 42 43 43 44 44 45 47 50 50 51 51 52 52 53 53



The study of the stock market of a country in terms of a wide range of macroeconomic 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

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 ones 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

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.



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

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 doesnt 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 dont have to gather at the Exchanges, and can trade freely from their home or office over the phone or through Internet.

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.

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 200910

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.


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.



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.



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 = factor (Price of stock x Number of shares) x Free float Adjustment Index Divisor



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.



Fig.1 BSE Index chart

Fig.2 DJIA Index chart


Fig.3 FTSE 100 Index chart

Fig.4 NIKKEI 225 Index chart


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 Golds 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, golds stability remains as compelling as ever for todays 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.

2) Inflation hedge Market cycles come and go, but over the long term, gold retains its purchasing power. Golds 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 worlds 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. Thats 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 golds most positive outlook in over a quarter of a century


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.


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. ECBs 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.


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.

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.


Gold in India
Indias centuries old gold industry is the worlds biggest market for the metal, with imports meeting almost all the countrys 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 Indias economic liberalization which has served to accelerate the countrys 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 20022010, 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 Indias $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.


Cultural beliefs Cultural ideas about gold have influenced all communities of India for generations. Golds mythology is sewn into the fabric of Indian society. Golds 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 ones wealth must be easily worn on ones 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 Indias currency reserves. Although, even with a substantial stock of gold reserves, golds 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 RBIs 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.



Fig.5 Gold Price (INR)

Fig.6 Gold Price (USD)


Fig.7 Gold Price (GBP)

Fig.8 Gold Price (JPY)


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

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 SubIndices 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 positivebut 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 cointegration 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.

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 investors 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

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.




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.


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.
Fig.9 Market Timings

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.

Table 1. Data Selection Criteria

Date 6/7/2010 7/7/2010 8/7/2010

TSE Open Close Open

BSE Open Open Open

LSE Close Close Open

NYSE Open Close Open Not selected Not selected 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





a) Stock Indices

Table 2. Descriptive Statistics of Indices

N DJIA BSE FTSE_100 NIKKEI Valid N (listwise) 705 705 705 705 705

Minimum 6547.05 8160.40 3512.10 7086.03

Maximum 12949.87 21004.96 6091.30 11292.83

Mean 10595.6539 16593.7909 5263.3152 9565.6476

Std. Deviation 1469.35245 2799.57334 608.22201 826.00704

Coef. of Variation 0.1386 0.1687 0.1155 0.0863


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.



Fig.10 Stock Indices Box Plot


b) Correlation between Stock Indices

Table 3. INDEX MOVEMENT (Correlations)

DJIA DJIA Pearson Correlation Coef. Of Determination N BSE Pearson Correlation Coef. Of Determination N FTSE_100 Pearson Correlation Coef. Of Determination N NIKKEI Pearson Correlation Coef. Of Determination N 705 .789

BSE 1 .789

FTSE_100 .945


.622 705 1

.893 705 .888


.066 705 .555


.622 705 .945


.788 705 .888


.308 705 .465


705 1

.893 705 .258


.788 705 .555


.216 705 .465


705 1

.066 705

.308 705

.216 705 705

**. 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.


c) Gold Price ( per Troy oz. or 31.103gm)

Table 4. Descriptive Statistics of Gold

N USD JPY GBP INR Valid N (listwise) 705 705 705 705 705

Minimum 810.00 72661.04 556.11 39714.30

Maximum 1895.00 146132.91 1184.19 91149.91

Mean 1275.5152

Std. Deviation Coef. Of Variation 276.85346 0.2175 0.1445 0.2082 0.2239

108670.0717 15707.73476 810.3806 59969.2787 168.78183 13431.64581

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


d) Correlation between Gold Prices

Table 5. GOLD Price Movement (Correlations)

USD USD Pearson Correlation Coef. Of Determination N JPY Pearson Correlation Coef. Of Determination N GBP Pearson Correlation Coef. Of Determination N INR Pearson Correlation Coef. Of Determination N 705 .984

JPY 1 .984

GBP .985

INR .972

.968 705 1

.970 705 .974


.944 705 .947


.968 705 .985


.948 705 .974


.896 705 .973


705 1

.970 705 .972


.948 705 .947


.946 705 .973


705 1

.944 705

.896 705

.946 705 705

**. 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.



Table 6. STOCK INDEX AND GOLD (Correlation)


No. of Days

Stock Index

Gold (in Pearson Coef. Of Currency) Correlation Determination

0.846 0.715














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.


14000 12000 10000 8000 Series1 6000 4000 2000 0 1 31 61 91 121 151 181 211 241 271 301 331 361 391 421 451 481 511 541 571 601 631 661 691 MA 50 Linear (Series1) y = 6.534x + 8288.

Fig.12 DJIA Trend Lines

2000.00 1800.00 y = 1.301x + 813.5 1600.00 1400.00 1200.00 1000.00 800.00 MA 50 600.00 400.00 200.00 0.00 1 31 61 91 121 151 181 211 241 271 301 331 361 391 421 451 481 511 541 571 601 631 661 691 Series1 Linear (Series1)

Fig.13 Gold (USD) Trend Lines


25000 y = 8.694x + 13525 20000

15000 Series1 10000 Linear (Series1) MA 50 5000

0 1 31 61 91 121 151 181 211 241 271 301 331 361 391 421 451 481 511 541 571 601 631 661 691

Fig.14 BSE Trend Lines

100000.00 90000.00 80000.00 70000.00 60000.00 50000.00 40000.00 30000.00 20000.00 10000.00 0.00 1 31 61 91 121 151 181 211 241 271 301 331 361 391 421 451 481 511 541 571 601 631 661 691 Series1 MA 50 Linear (Series1) y = 61.31x + 38209

Fig.15 Gold (INR) Trend Lines


7000 6000 5000 4000 Series1 3000 2000 1000 0 1 31 61 91 121 151 181 211 241 271 301 331 361 391 421 451 481 511 541 571 601 631 661 691 Linear (Series1) MA 50 y = 2.273x + 4460.

Fig.16 FTSE 100 Trend Lines

1400.00 1200.00 y = 0.781x + 533.0 1000.00 800.00 Series1 600.00 400.00 200.00 0.00 1 31 61 91 121 151 181 211 241 271 301 331 361 391 421 451 481 511 541 571 601 631 661 691 Linear (Series1) MA 50

Fig.17 Gold (GBP) Trend Lines


12000 10000 y = -0.322x + 9679. 8000 6000 4000 2000 0 1 31 61 91 121 151 181 211 241 271 301 331 361 391 421 451 481 511 541 571 601 631 661 691 Series1 Linear (Series1) MA 50

Fig.18 NIKKEI Trend Lines

160000.00 140000.00 y = 72.03x + 83050 120000.00 100000.00 80000.00 60000.00 40000.00 20000.00 0.00 1 31 61 91 121 151 181 211 241 271 301 331 361 391 421 451 481 511 541 571 601 631 661 691 Series1 Linear (Series1) MA 50

Fig.19 Gold (JPY) Trend Lines


Table 7. Stock Index Monthly Returns N DJIA BSE FTSE_100 NIKKEI Valid N (listwise) 36 36 36 36 36 Minimum -16.00 -12.88 -11.75 -13.84 Maximum 13.77 20.30 11.60 13.73 Mean 0.9089 1.2096 0.5925 -0.1525 Std. Deviation 6.03712 8.05289 5.71521 6.50438

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 45

b) Correlation between Stock Indices Monthly Return

Table 8. Stock Return (Correlations)

DJIA DJIA Pearson Correlation Coef. Of Determination N BSE Pearson Correlation Coef. Of Determination N FTSE_100 Pearson Correlation Coef. Of Determination N NIKKEI Pearson Correlation Coef. Of Determination N **. Correlation is significant at the 0.01 level (2-tailed). 36 .619

BSE 1 .619

FTSE_100 .916


.383 36 1

.839 36 .663

.478 36 .536

.383 36 .916

.439 36 .663

.287 36 .665

36 1

.839 36 .692

.439 36 .536

.442 36 .665

36 1

.478 36

.287 36

.442 36 36

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.


c) Gold Price Monthly Returns

Table 9. Gold Price Monthly Returns N USD JPY GBP INR Valid N (listwise) 36 36 36 36 36 Minimum -12.46 -12.62 -8.80 -6.18 Maximum 14.45 14.65 14.78 18.24 Mean 1.7681 1.2316 1.5760 2.0096 Std. Deviation 5.53260 5.40014 5.83156 5.38159 Coef. Of Variation 3.14 4.39 3.71 2.67

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


d) Correlation between Gold Price Monthly Return

Table 10. Gold Return (Correlations)

GOLD_USD GOLD_USD Pearson Correlation Coef. Of Determination N GOLD_JPY Pearson Correlation Coef. Of Determination N GOLD_GBP Pearson Correlation Coef. Of Determination N GOLD_INR Pearson Correlation Coef. Of Determination N **. Correlation is significant at the 0.01 level (2-tailed). 36 .845

GOLD_JPY 1 .845



.714 36 1

.720 36 .740

.769 36 .783

.714 36 .849

.548 36 .740

.613 36 .880

36 1

.720 36 .877

.548 36 .783

.774 36 .880

36 1

.769 36

.613 36

.774 36 36

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.



Table 11. Stock Return and Gold Return (Correlation)


No. of Months

Stock Index

Gold (in Currency)


Pearson Correlation -0.126 -0.286 -0.376 -0.095

Coefficient of Determination 0.016 0.082 0.141 0.009








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.


20 15 10 5 Series1 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 -5 -10 -15 -20 Linear (Series1) y = 0.004x + 1.005 R = 7E-05

Fig.22 DJIA Return Trend Line

20 15 10 5 0 1 -5 -10 -15 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 y = -0.038x + 2.652 R = 0.005

Series1 Linear (Series1)

Fig.23 Gold (USD) Return Trend


25 20 15 10 Series1 5 Linear (Series1) 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 -5 -10 -15 y = -0.247x + 6.126 R = 0.097

Fig.24 BSE Return Trend Line



y = 0.033x + 1.551 R = 0.004


10 Series1 Linear (Series1) 5

0 1 -5 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35


Fig.25 Gold(INR) Return Trend Line


15 y = -0.027x + 1.26 R = 0.002


5 Series1 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 -5 Linear (Series1)



Fig.26 FTSE 100 Return Trend Line



y = -0.004x + 1.831 R = 5E-05

10 Series1 5 Linear (Series1) 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 -5


Fig.27 Gold(GBP) Return Trend Line


20 15 10 5 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 -5 -10 -15 y = -0.086x + 1.650 R = 0.019

Series1 Linear (Series1)

Fig.28 NIKKEI Return Trend Line

20 15 10 5 0 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 -5 -10 -15 y = -0.063x + 2.555 R = 0.015

Series1 Linear (Series1)

Fig.29 Gold (JPY) Return Trend Line




Yearly Returns (%) 2009 2010 2011

16.40 24.23 9.77 22.57 4.04 9.77

3 yr return (%) 2009-11

31.09 58.43



52.34 20.45

14.94 19.64

-28.24 26.36

40.81 67.41


16.44 14.77

8.21 27.19

-7.62 10.12

19.62 51.95


15.38 23.78

-4.08 10.37

-20.68 3.37

-6.72 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.




Annualized Volatility 2009 2010 2011

24.27 20.52 16.04 15.64 21.15 21.88

3 yr volatility 2009-11
36.01 34.42



34.56 19.54

16.38 15.73

20.97 20.48

44.02 32.84


23.51 23.23

17.71 16.95

20.38 21.14

35.97 36.17


26.93 21.51

20.52 17.74

23.45 22.59

41.41 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.


Chapter 5: 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 doesnt 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.




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