Gold was based on the secondary data which has

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.

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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.

REFERENCES

Bhunia, A.
and Ganguly, S. (2015). Cointegration Influence of Macroeconomic Indicators on
Stock Market Index in India. American
Journal of Theoretical and Applied Business, Vol.1
(1), pp.1-5.Bhunia, D.A. (2013).
Cointegration and causal relationship among crude oil, Domestic Gold price and
financial variables- An evidence of BSE and NSE. Journal of Contemporary Issues in Business Research.Gayathri, V. and
Dhanabhakyam. (2014).Cointegration and Causal Relationship between Gold Price
and Nifty- An Empirical Study. Abhinav
International Monthly Referred Journal of Research in Management and Technology.
Vol.3 (7), July, pp.14-21.Jaiswal, B. and Manoj,
S. (2015). An Analysis of Gold Price Variation and Its Impact on Commodity
Market in India. A Journal of Economics
and Management, Vol. 4(7), pp.59-79.Narang, S.P. and Singh,
R. (2013). Causal Relationship between
Gold Price and Sensex: A Study in Indian Context. Vivekananda Journal of Research, pp.33-37.Rejeb, B. and Arfaoui,
M. (2016).Oil, gold, US dollar and Stock market interdependencies: A global
analytical insight. Retrieved from: https://mpra.ub.uni-muenchen.de/70452/1/MPRA_paper_70452.pdf.Wang, M.W.C. (2010).
Relationships among Oil price, gold price and exchange rate and international
stock markets. International Research
Journal of Finance and Economics, 47, pp.80-89.Yahyazadehfar, M. and Babaie, A. (2012). Macroeconomic variables and
stock price: New evidence from Iran. Middle
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