Gold

has traditionally been considered an attractive investment in India and its

excellent performance in recent years has substantially confirmed the wisdom of

that tradition. When markets are volatile and investors panic they tend to move

out the risky assets such as stock and invest into assets such as gold. The main

objective of the paper is to analyse the effect of Gold prices on Indian stock

market represented by BSE-SENSEX. The study was based on the secondary data

which has been taken from April 2007 to March 2016. The monthly average data

has been considered for the study including 108 observations. Econometric

regression analysis indicated that Gold prices had a significant influence on Indian

Stock Market represented by BSE-SENSEX. Furthermore,

Karl Pearson’s correlation results showed the positive correlation between Gold

prices and Sensex. It means that Sensex index lead to increase in gold price

and rise in gold price lead to increase in Sensex.

Keywords: Gold,

SENSEX, Descriptive Statistics, Unit Root Test, Econometric Regression Analysis

and Karl Pearson’s Correlation.

INTRODUCTION

Financial

markets play a decisive role in the foundation of a stable and efficient

financial system of any economy. There are numerous domestic and international

factors which are seen to have a direct or indirect impact on the performance

of stock markets. The relationship between core macroeconomic variables,

commodities and a developed stock market is well documented in literature.

Moreover, as far as the financial returns are concerned, the investment in the

commodities has become a good spot for booking good returns in hedging against

the inflation, since the returns in precious metals segments can be observed

more than that of the returns expected in the equity and debt markets, as the

former are negatively correlated (Jaiswal and Manoj, 2010). In commodity

market, gold has its unique relevance. It has become one of the most widely

discussed metals due to its prominent role in both the investment and consumer

world. Even though gold is no longer used as a primary form of currency in

developed nations, but it continued to have a strong impact on the value of

those currencies. In addition to this, there is a strong correlation between

its value and the strength of currencies trading on foreign exchanges. Moreover, many researchers have also identified the

long-run and short-run relationships between stock price index and gold price

in developed and developing nations. The research also explicates that the gold

prices can influence the stock market to a great extent (Yahyazadehfar and

Babaie, 2012). The investment in the gold mainly becomes appealing and radiant,

when investors have to otherwise bear diminishing stock market returns in times

of upset stock market conditions.

Gold was one of the first metals

excavated by humans. Gold has traditionally been considered an attractive

investment in India and its excellent performance in recent years has

substantially confirmed the wisdom of that tradition. When markets are volatile

and investors panic they tend to move out the risky assets such as stock and invest

into assets such as gold. Gold like virtually all commodities is traded on a

dollar dominated basis.

The

domestic gold price in India is continuously increasing due to its heavy demand

in the country. There are several reasons gold has high demand in India. The

first reason is security; gold offers full security as long as it is retained

by central banks. There is no credit risk attached to gold. Secondly, gold is

able to maintain its liquidity even at times of crisis situations like high

global inflation or political turbulence. The third reason for holding gold is

to build a diversified portfolio (Narang and Singh, 2013).

REVIEW OF LITERATURE

Wang

(2010) investigated the effects of variations and long run &short run

relationships in crude oil prices, gold price and exchange rates of various

currencies on the stock market indices.

Bhunia

(2013) examined the relationship among crude price, gold price and financial

variables. The period of the study was taken from 1991 to 2012. The study

envisaged that there subsist a long term co integration and causality between

the financial variables taken for the study of both NSE and BSE.

Narang and Singh (2013) aimed at

investigating the dynamic relationship between gold prices and stock market returns

in India. In the study, an attempt has

been made to investigate the existence of unidirectional or bidirectional

relationship between gold price and Sensex for the period of 10 years

(2002-2012). The results of the analysis show that there is no causality

between the gold price and Sensex.

Gayathri

and Dhanabhakyam (2014) made an attempt to test the co-integration and

causality between Gold price and NSE-Nifty for a period of ten years including

2888 daily observations. The result of the study indicated that there is a long

run co-integration relationship between the variables. Furthermore, the study

showed a unidirectional causality relationship between Gold prices and

NSE-Nifty index.

Bhunia

and Ganguly (2015)

studied the influence of two commodity indicators,

namely gold and crude oil, GDP growth rate and exchange rates on the stock

market index in India. The period of the study was ranging from the year 1991

and to the year 2013. It was found that there is significant long-term co-integration

and unwavering relationship between the respected variables. Further, it was

concluded that the Indian stock

market index is much dependable upon the prices of international crude oil,

prices of gold, exchange rates and GDP growth rate.

Rejeb and Arfaoui (2016) analysed the relationships

between oil, gold, US dollar and stock prices from January 1995 to October

2015. It has been discussed that when business cycles reflects downfall, and

the dollar and stock exchanges move downwards, then gold becomes more appealing

and thus its value increases. In addition to this it has been found that gold

prices are concerned by changes in oil prices, US dollars and changes in stock

markets but somewhat also depends on the US oil gross imports and default

premium.

OBJECTIVE OF THE STUDY

The main

objective of the study is to investigate the influence of Gold prices on Indian

stock market represented by BSE-SENSEX

RESEARCH METHODOLOGY

In the

study, a time span of 9 years has been chosen for this study from April, 2007

to March, 2016 uses monthly data to portray a larger view of the relationship

including 108 observations. BSE-SENSEX is the representative of Indian stock

market. Here, descriptive statistics provide a historical account of variables

behaviour and convey some future aspects of the distribution of data set. For

the purpose, measures of central tendency (mean) and measures of variability

(standard deviation, range, minimum & maximum, skewness, kurtosis and

Jarque-Bera statistics) to explain the dataset. The current study unravels the

linkage between Gold and Sensex in the Indian context using techniques like ADF

test & Unit root test, correlation and regression using Eview7 Software.

RBI website has been referred for Gold prices. Lastly SEBI website has been

referred for collecting the data of BSE-SENSEX.

EMPIRICAL

ANALYSIS AND FINDINGS

Descriptive Statistics of Gold during the Sample Period

Figure 1 highlights the average value of gold during the sample period

21877.12 with the standard deviation of 7283.09. The results indicate the

presence of negative skewness and moment of kurtosis of gold. Fig 1 depicted that the distribution is not

normal as the probability value (0.004) of Jarque- Bera Test statistics (10.76)

and this is due to the presence of negative skewness (-0.38) and platykurtic

behavior of broad money (1.65). The maximum price of gold was found to be

31672.83 during the period. The minimum gold price during the said period came

out to be 8707.42.

Fig 1: Descriptive Statistics of Gold price

Descriptive Statistics of Sensex during the Sample Period

Figure2 indicates that the mean value of Sensex during the sample period

is 7415.013 with the standard deviation of 1943.361. The high standard

deviation value indicates the high level of deviations in sensex values during

the sample period. The results also indicate the presence of positive skewness

(0.291) and platykurtic behavior (2.86) (where kurtosis is less than 3) of Sensex.

The distribution is also normal as indicated by probability value (0.44) of

Jarque- Bera Test statistics (1.611). The highest value of sensex is found to

be 11454.35 during the period. The minimum value of sensex during the sample

period is found to be 3232.110.

Fig 2: Descriptive Statistics of Sensex

Unit Root Test Results:

The ADF test is conducted for gold prices to test the stationary of the

series where the mean and variance are constant. The results of the ADF test

are exhibited in Table1 below:

Table1: Unit Root Test of Gold at first

differencing I (1) level

Null Hypothesis: D(GOLD) has a unit root

Exogenous: Constant

Augmented Dickey-Fuller test statistic

t-Statistic

Prob.

-9.193236

0.0000*

Test critical

values:

1% level

-3.493129

5% level

-2.888932

10% level

-2.581453

*MacKinnon (1996)

one-sided p-values.

Source:

Compiled with E-views Software *Significant

at 5% level

D (GOLD) =log

values of Gold

Here, as the test statistic value -9.193236 is less than the critical values at 1%

(-3.493129), 5% (-2.888932) and 10% (-2.581453) respectively at the probability

value less than 0.05 i.e. 0.0000. Hence, the null hypothesis that there is no

unit root for log of gold price is rejected and the alternative hypothesis is

accepted. The rejection of null hypothesis supports the stationarity of Gold

prices at first difference i.e. I (1) level.

From the Table 2 that reflects the

result of ADF implies that, the ADF test statistic value (-5.370422) is less than the test critical values at 1%

(-3.494378), 5% (-2.889474) and 10% (-2.581741) respectively with the

probability value less than 5%. Hence, the null hypothesis is rejected. The

rejection of null hypothesis supports the stationary of Sensex at I (1) level.

Table2: Unit Root

Test of Sensex at first differencing I (1) level

Null Hypothesis: D(SENSEX) has a unit root

Exogenous: Constant

Augmented

Dickey-Fuller test statistic

t-Statistic

Prob.

-5.370422

0.0000*

Test critical values:

1% level

-3.494378

5% level

-2.889474

10% level

-2.581741

*MacKinnon (1996)

one-sided p-values.

Source:

Compiled with E-views Software *Significant

at 5% level

D (SENSEX) =log

values of Sensex

Econometric Regression

Results:

Econometric

Regression analysis is a technique to check the effect of Gold on Indian Stock

Market and found some interesting results for the relationship. Gold price has

a dependent relationship among BSE-SENSEX. The null hypothesis has been tested

on the basis of the p-value while the overall significance of model has been

tested on the basis of F-sign. If the p-value and t-statistic is less than the

critical p-value and t-statistic at 5% of significance level, then the null

hypothesis is rejected and there will be a significant relation between the

variables. The following statement of hypotheses is as follows:

H0: There is no

significant impact of Gold prices on Indian Stock market represented by

BSE-SENSEX.

Ha: There is a

significant impact of Gold prices on Indian Stock market represented by

BSE-SENSEX.

The following variables which are stationary at the first

differencing, take the log of original values and make a new variable which can

be expressed as symbolically:

SENSEX NEW= d log (SENSEX)

GOLD NEW = d log (GOLD)

The result of

regression model is represented in Table 3 which can be expressed

mathematically as: Y= ?+?1 GOLD

NEW+?

Where Y= SENSEX

NEW,

?= Intercept,

?1= Slope

Independent variable = GOLD NEW

Table 3: Econometric Regression Model by Equation between GOLD and

BSE-SENSEX

Dependent Variable: SENSEX NEW

Method: Least Squares

Variable

Coefficient

Std. Error

t-Statistic

Prob.

GOLD NEW

-0.510546

0.191419

-2.667166

0.0089*

C

0.011467

0.007530

1.522910

0.1308

R-squared

0.063451

Mean

dependent var

0.006085

Adjusted R-squared

0.054532

S.D.

dependent var

0.077174

S.E. of regression

0.075040

Akaike

info criterion

-2.323080

Sum squared resid

0.591253

Schwarz

criterion

-2.273120

Log likelihood

126.2848

Hannan-Quinn

criter.

-2.302827

F-statistic

7.113776

Durbin-Watson

stat

1.691401

Prob(F-statistic)

0.008861

Source: Compiled with E-views software *Significant at 5% level

The

table above shows simple linear regression test for Gold price and Sensex. It

was found through p-value and t-statistics that there is a significant

relationship between Gold and Sensex. BSE-SENSEX is considered as the

representative of Indian stock market and used to obtain a measure of market

price movement of Indian securities. Thus, Gold prices (t-value=-2.66, p-value=0.0089 respectively) had a

significant impact on BSE-SENSEX. It leads to the rejection of null hypothesis

(H0) as p-value is less than 0.05 at level of significance. Thus, H0

is rejected from which it can be inferred that there is a significant impact of

Gold price on Indian Stock market represented by BSE-SENSEX. R2shows the model fitness of a regression equation and

also explains the variation in dependent variable which is made by an

independent variable. Table 3 presented that Gold price explain approximately

6.3 per cent of variation in BSE-SENSEX.

Correlation test Results:

Table4:

Karl Pearson’s Correlation between Gold price and Sensex

Results

Sensex

Gold

Pearson Correlation

Sensex

1.000

.442

Gold

.442

1.000

Sig. (1-tailed)

Sensex

.

.000*

Gold

.000*

.

Table 4

exhibited the Karl

Pearson’s Correlation (r) between Gold price and Sensex during the period of

time taken for the study. According to the results, there is a significant positive

correlation subsist between the variables (r=.442, p-value=.000 respectively at

5% significant level). It means that more the value of Gold, high will be the

value of Sensex and vice versa.

Source:

Compiled with SPSS Software *Significant

at 5% level

CONCLUSION

In the study, the dynamic relationship

has been examined between Sensex and gold price. The results of Augmented Dickey-

Fuller test conclude that the series are stationary and integrated of order

one. There is a positive correlation between Sensex and Gold price from 2007 to

2016 even economic crisis breaks out in USA in 2008 and 2011. Hence, the

correlation results reveal that Sensex index lead to increase in gold price and

rise in gold price lead to increase in Sensex. The results of econometric

regression reflected that gold prices had a significant impact on stock market

indicator BSE-SENSEX. It shows the dependency relationship among the variables

taken under study.

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