Study On Relation Between Stock Market And Gold Market

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Abstract- The growing popularity of gold market investment has been evident from the continuous increase in the number of individual investors. India is one of the largest consumers of gold and the price of gold is rising every day. Also the historical data shows that there is an inverse relation between gold, the dollar, and the stock market. The study examines the relationship between the two variables gold price and stock market index for the period of 2011-2019 using time series data and to analyse the present trend of the gold market and stock market. Unit root test, Johansen’s co integration method and Granger’s causality method are employed for analysing the data. The results of the analysis reveal that there is no long-run relation between Sensex return and Gold price in India and there is no cause and effect relation between these variables.

Keywords: Gold Market, Stock Market index, Trend analysis, Long run relation.

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Introduction

The stock market in India has witnessed tremendous growth in market capitalisation along with a high economic growth in the last two decades since liberalisation. The activities in the financial markets and their relationship with other sectors of the economy have significant importance. The capital market performance can be easily identified by the indices that are the movement of stock price being traded in the capital market. Gold price represents the commodity market of an economy. Gold is always been considered as a sacred item in life. Since the prehistoric period, man continues to use gold in trade and as an asset. Even now financial activities are always based on gold. Gold is the world’s international currency. It is an important element of global monetary reserves. Gold has become an inseparable part of almost every household in Indian society and infused into the blood of an Indian. Over a while the Indian consumers are realizing that gold offers full security as it is retained by the central bank, then it can maintain liquidity even at the time of inflation and other economic turbulence, gold has a valuable attribute such as portfolio diversification, hedge and safe heaven that being in the bank locker. These are the main reasons why the demand for gold is increasing.

Most of all forms of investment involve some kind of risk. Investment can be broadly classified into two financial investment and non-financial investment. Financial assets can be stocks, bonds, debentures etc., whereas non-financial investments are gold and real estate which is otherwise known as real assets. Investment in gold has been seen as the excellent way of safe heaven investment. Gold investment is booming in recent years and the reason behind this can be that the investors become more aware of the benefit of the gold and its special features. Investment in gold is showing an increasing trend. Generally, gold demand can be classified into three, which includes jewellery demand, gold investment demand, and industrial demand. Gold investment can be further classified into physically and non-physically holding the gold.

India’s investment in gold is nearly 15- 18%. Gold in the form of investment is exclusively in physical form, typically a gold bar or gold coin. The importance of this industry is evident from their contribution towards country’s Gross Domestic Product (GDP) which constitutes around 7% and 15.7% to India’s total merchandise exports. As per the report published by the World Gold Council, it is said that the demand for gold jewellery alone in India increased by 18.7 tonnes (12%) to 168.6 tonnes, compared with 149.9 tonnes in Q2-2018 the best quarter growth since Q2-2017, and as per the National Sample Survey Office (NSSO) data.

Statement Of The Problem

In the last two decades, the financial environment in India has undergone tremendous change. In India, the share of the household sector in the overall domestic savings is largely represented by individual investors. Although these individual investors occupy an important place among the various economic units in the country, they are often challenged by the composite set of investment alternatives. All this is due to the various innovations taking place with respect to the various financial instruments. Gold prices are a good indicator of how healthy an economy is. Investors prefer gold when they are defending their investment from a crisis. And when the gold price falls it means that the market is healthy or booming. The price of gold is increasing day by day this will increase the domestic price. But the demand for the gold remains sustained in India even if the price increases. Historical data reveals that when stock market crashes or dollar weakens, gold continues to be a safe heaven investment because of the rising gold price. This point out that there can be an inverse relationship between gold price and stock market return.

Objectives

  1. To examine the relationship between the gold price and the Indian Stock market
  2. To analyse the trend of the Indian gold market and Stock market.

Hypothesis

  1. H01 – The selected time series is not stationary.
  2. H02 – There is no long-run relationship between Gold price and Sensex.
  3. H03 – Sensex returns do not granger cause Gold price.

Research Methodology

For this study, the researcher has used secondary data which is obtained from websites such as BSE and MCX. Monthly Closing prices of the Sensex and gold price (10 grams) are considered. The sample period ranges from 1st January 2011 to 28th February 2020 with 268 number of observations from both variables have been included. E Views 11 packages have been used for analysis. Econometrics techniques of Correlation analysis, Augmented Dickey-Fuller test, Johansen’s Cointegration test and Grangers Causality test are used for analysis.

Literature Review

This section outlines the major related reviews available:

Ahmad Raza Bilal (2013) – Examined the long-run relationship between the gold price and Karachi Stock Exchange and Bombay Stock exchange in perspective of supply and demand of gold and its impact on value of stock index. Time series data were used for analysis from a period of 2005- 2011. To obtain accurate results, tests used are i) Descriptive statistics ii) Unit root test (ADF) iii) Vector Auto Regression iv) Johansen’s Co integration test and v) Grangers Causality test. The findings of the study revealed that, there is no long run relationship exist between monthly average gold price and KSE 100 index, however, BSE index showed a long run relationship between average gold prices. Also Granger’s Causality test reveals that no causal relationship among average gold prices and BSE and KSE 100 index.

Meenu Piplani & Dr. Rajesh Kundu (2017) – Their main objective of the study was to investigate the relationship of gold price (independent variable) on Indian Stock market (BSE Sensex). Monthly data from January 2000 to September 2016 were used for analysis. The methodology of the study includes the application of statistical and econometrics models (regression model). The study concluded that gold price had a positive impact and relation to the Sensex.

Narang & Singh(2012) – The paper aims to investigate the dynamic relationship between gold price and stock market for a period of 10 years (2002-2012). Monthly data on domestic gold price and stock market index was used for analysis. The results of the Augmented Dickey Fuller test reveals that the time series are stationary and integrated. There is a positive correlation between gold price and stock return till 2007, but due to the economic crisis the correlation started fading. And using Johansen’s co integration test, it was found that there is no relation between gold price and stock return. Lastly the granger causality test revealed that there is no causality between the gold price and Sensex.

Somnath Mukhuti (2018) – Investigated the relationship between gold price and Indian stock market indexes (Sensex & Nifty). The study covered the data for 10 years (January 2008 to August 2018). The study used various statistical and econometric tools such as correlation, regression, Unit root test, co integration test, Granger Causality test. The study concluded that, there are no causality exists between Nifty and gold price, Sensex and gold Price and Sensex and Nifty.

Dr.Karamjeet Kaur (2018) – examined the relationship between Indian gold price and Indian stock market index for a period of January 2010 to December 2015. The researcher has used econometric techniques like Augmented Dickey Fuller, Phillips Perron test, Johansen’s co integration test and Granger’s causality test. The results of the analysis were the data are not stationary. But are stationary at 1st difference. The results of Johansen’s co integration tests shows that there is no log run association between gold price and Sensex. Also the Grangers causality test concluded that gold return does not cause and affect the stock return and vice versa.

Bhunia & Das (2012) – examined the gold price volatility and the causal relationship between gold price and stock market return. The data for analysis spans from 2001 to 2011. To examine the stationary of time series data Augmented Dickey Fuller unit root test has been employed, to check the long run relation, Johansen’s co integration test has been used. And Granger causality test was used to test the causality between the variables. The results of ADF reveals that the variables are stationary and integrated of same order. Co integration test shows that there exists a long run relationship between the variables, the Granger causality test showed that each variable contains some significant information that is one can be used to predict the other.

Somnath Mukhuti & Bhunia (2013) – Investigates the reaction of the stock market (Sensex & Nifty) on the gold price for a period of 21 years (1991- 2012) using time series data. To test the stationary, Augmented Dickey Fuller unit root method was used. Bivariate and multivariate co integration methods and pairwise Granger causal method was also used in the research. The results of the test were time series were not at stationary levels. However, Phillip Perron unit root test checked the stationary of the data series and it reveals that the selected series were stationary at 1st difference. Bivariate co integration test results show that there is no ling run relationship between the selected variables. Multivariate cointegration between the gold price and Indian stock market index.

Bhunia (2013) – Explores the relationship between two commodity market indicators (oil & gold) and stock market in India. The data used for analysis was from (1991 to 2012). Johansen’s co integration test. ADF unit root test, Granger’s causality method were used for analysis. The ADF unit root test reveals that World Crude index, Indian gold price and stock market are not stationary whereas at 1st difference, the two commodity indicator and Sensex are stationary. The results of multivariate co integration test shows that there exists a long run relationship between the selected variables. Also the study reveals that there is bidirectional causal connection present between the stock market and two commodity indicators.

Sreekanth & Krishna (2014) – Conducted a study on the causal relation between Gold price and NIFTY. The period of data collected for analysis was from 2003 to 2015. The results of the ADF and PP test revealed that the data are stationary at level and there exists a co integration in the long run between the variables was the result of Johansen’s Co integration test. The result of Granger’s causality test confirmed that there is a causality between gold prices to NIFTY and finally the Vector Error Correction Model (VECM) further explained that gold price was sufficient to explain the NIFTY moments in both short run and long run.

Maryam Al-Ameer (2018) – Examines the relationship between two main economic varilabe; Gold and Stock market in germany that is represented by the HDAX Index under the Frankfurt Stock Exchange. The researchers used monthly data collected from Bloomberg database spanning from August 2004 to September 2016 (12 years) in order to use them in the selcted tests in this research which are : (Descriptive statistic tests, Pearson’s correlation test, unit root test to assure data are stationary for the Johansen’s Co- integration test and Granger Causality test). The data were divided into three periods: Pre, during and post to the financial crisis to measure the different effects in each period. The results showed that there is a correlation between gold and stock market that differs in each period, as for the whole period of 12 years there was a moderate positive correlation, before the financial crisis there was a very strong positive correlation, during the financial crisis the correlation was positive but weak and low which means its insignificant, while at the period after the financial crisis the correlation changed in nature as it became a strong high negative correlation. The co-integration test results were all the same for all three different periods (before, during and after the financial crisis) and also for the whole 12 years period that is there is a long-run relationship between gold and stock market(represented by the HDAX index). The same thing applies to the Granger causality test, as there was no Granger causality( no cause-effect relationship) between gold and stock market. The capital market movement is represented by Bombay Stock Exchange benchmark Sensex and gold price represents the commodity market. Connecting these two markets, it has been observed that when the market falls the price of the gold rises indicating that they move in the opposite direction. It is a matter of pride that BSE Sensex has completed 41 years. Sensex being the barometer of India’s growth reflects the changes that happen in the Indian economy. This benchmark fully reflects the fundamental role that an indices play in our financial market. The benchmark crossed the 1000 mark for the first time in 2006 and reached its highest point of 39000 for the first time in April 2019. The trend of BSE Sensex shows upward trends and there have been periods of exceptionally fast growth and also some period of slower rise for Sensex. The gold market in India is also witnessing an upward trend and there have been times which show great volatility in the prices of the gold. Economic activity weakened sharply in March 2020 on account of the COVID-19 outbreak.

So the present study has examined the relationship between Gold price and Sensex in the Indian context. The period of the study was from January 2010 to February 2020 and monthly data of both variables were used. Correlation analysis between the variables showed that there exists a high positive correlation between the gold price and SENSEX but that doesn’t prove that one is caused by another. The Augment Dickey-Fuller- Unit Root Test reveals that both the series are stationary at 1st order. Johansen’s Co integration test results say that there doesn’t exist any long run relation between gold price and Sensex during this period also Grangers Causality test concluded that Sensex return does not cause any effect on gold price and vice versa.

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