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ABSTRACT
Gold has been used around the world as an instrument for investment to hedge against inflation or in the
form of jewellery. All these factors are the reason for hyping the demand for gold day by day. As per world
gold council gold demand in India is about to rise 33% by 2020.The cumulative annual demand will be
excess of 1,200 tonnes by 2020.Recently India has become the largest consumer of gold and price of gold is
likely to breach Rs 32,000 mark in the next calendar year. There is an inverse relationship between gold
price and dollar. In this paper, 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.
Introduction:
Gold appears to have its own “logics” and mystique.
It has traditionally been very conservative
investment due to it's relatively scarcity, but it tends
to accurate reflector of short term fear about the
economy in general. 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.
In times of crisis, capital often flow out of emerging
markets currencies. This makes it a doubly attractive
investment for Indian investors in volatile times, the
rise in the rupee price of gold is fuelled by both the
increase in international gold prices and by the
appreciation of the dollar against the rupee.
Gold as an investment option was dramatically
illustrated in early 2009. Gold surged even as global
stock markets plunged and the rupee briefly traded
at Rs. 51 to the dollar.
Prior to the introduction of liberalization and
globalization policies, gold prices in India showed
an increasing trend (Figure-1). In the post
liberalization period, the average annual prices of
gold also showed an increasing trend from the year
but, it showed a decreasing trend in 1997 and 1998
and again showed an increasing trend in the year
2000. From 2002 to 2012, gold prices are
continuously increasing. 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. Gold also has taken the role of an asset of
last resort. World Economic History shows that
countries have repeatedly used gold as security
against loans when they have had difficulties with
their Balance of Payments and have felt the need to
borrow on the international capital markets.
Data andMethodology
This paper aims at investigating the dynamic
relationship between gold prices and stock market
returns in India for the period 2002 to 2012. This
study is mainly based on secondary data that have
been collected from the database on Indian
economy maintained by Reserve Bank of India
and Bombay Bullion Association. The study
analyses the monthly data on domestic gold prices
and stock market returns in India for the aforesaid
period. Wherever data were missing, the averages
of the data of the previous month and next month
have been taken.
The monthly stock market returns ( based on
BSE Sensex have been calculated by the
logarithmic difference change in the Sensex,
Conclusion
In this paper, the casual relationship has been
examined between Sensex and gold price. The study
uses the monthly data which is collected from
Reserve bank of India, Bombay bullion association
and from bse-india.com. The results of Augmented
Dickey- Fuller test conclude that the series are
stationary and integrated of order one. There is a
positive correlation between stock returns and gold
price from 2002 to 2007 but due to economic crisis
in USAin 2008 and 2011 this correlation seems to be
fading and it was establish by using correlation and
Johansen's co-integration test that there is no
relation between gold prices and stock returns i.e.
Sensex return in the long run period. The results of
Granger causality test reveals that returns of Sensex
index does not lead to increase in gold price and rise
in gold price does not lead to increase in Sensex.