TABLE OF CONTENT

S.NO CONTENTS PAGE NO.

01 INTRODUCTION 03

02 REVIEW OF LITERATURE 06

03 RATIONALE OF THE STUDY 09

04 OBJECTIVE 11

05 METHODOLOGY 13

06 HYPOTHESIS 15

07 DATA ANALYSIS 17

08 FINDIGS 26

09 CONCLUSION 28

10 REFERENCE 30

1
INTRODUCTION

2
INTRODUCTION
The price of gold in January 2002 was Rs. 3097 per 10 grams but in December 2012 it was Rs.
31,150 per 10 grams. The gold prices during last decade have been increased by nearly 900%.
What were the main factors behind this?

“Gold has been mesmerizing humankind ever since its discovery. It is one of the most
precious metals found till date and also the most liquid asset too. Gold is backbone of all
economies since its inception. It is the best investment for common people. In present era also
it is used by investors as an instrument to hedge their portfolio investment. The monetary
demand of gold has been on roll during last decade as well as non-monetary demand. All the
countries in the world use gold as their mode of transaction during international trade. It has
also been observed that countries with large gold backing to their currency also have their
currency internationally acceptable. Gold prices are on steep rise during the last decade and
still rising.”

What were the factors that lead to this historical rise in the prices of Gold during this specific
period of time in India? This research paper studies the various factors contributing towards
the continuously escalating prices of gold in India and how factors like international business
environment, political environment, market conditions, its induction in commodity market,
buying behavior of consumers, and inflation have affected prices of gold during last decade.
The paper specially focuses on rise in gold prices in India during the last decade (between
years 2002 to 2012).

2014 saw a decline in gold prices, plus the Modi government is widely expected to allow more
imports of gold over time. This directly affects the Indian consumers who happen to be among
the top buyers of this precious metal. Our paper addresses the issue of gold pricing in relation
to its most important variables to help the readers make educated decisions about their future
purchases.

Gold, one of the most used investment and hedging tools in the market, has seen a price
increase from 1994 to 2013 on the whole as well as fluctuations in the short run. Its price
increased from an average of US$385.42 per ounce in 1994 to an average of $1700 per
ouncein2012.

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Even taking the inflation into consideration, the gold price still jumped dramatically but it fell
to $1598 per ounce from 2012 to 2013 and is continuing its downward spiral.

Gold price is determined by many factors, such as the US dollar to Indian Rupee exchange
rate, Inflation Rate, Crude oil prices, US dollar short term and long terminterest rates, and US
real GDP. This paper empirically analyses these factors affecting the price of gold by using
Ordinary Least Square, Weighted Least Square and White-test etc. to help explain this
correlation and give guidance to investors regarding any future investment that they may have
in mind.

Gold has long been considered one of the most precious metals, and its value has been used as
the standard for many currencies (known as the gold standard) in history. Gold has been used
as a symbol for purity, value, royalty, and particularly roles that combine these properties. It is
used in international transactions. Gold consumption observed a sharp acceleration during the
1990s amidst liberalization of gold import policy, strong economic growth and favourable
movements in gold prices. Gold is now being used as an alternative for dollar since its
collapse. Monetary and Non-Monetary demand for gold is steeply rising.

It has been demanded by individual buyer, institutional buyer as well as he Countries too.
There has been drastic increase in the prices of gold since 2001. Gold prices have been
increased by 900% during last 10 years. Traditionally gold has been a safe investment option
in India, but its role has changed with the time.

Gold is now being traded and forecasted as a commodity (Greely & Currie, 2008). Gold has
entered in to secular bull market, since than the prices are on rise. Gold unlike any other
commodity has been constantly providing plenty yield to its investors. As in India, gold has
been traditionally used in jewelry, but it was long thought as an invest option by ancestors also
hedging financial risks. Krauth (2011) in his report has clearly mentioned that the demand for
the gold will rise and will surpass $ 2500/oz in coming days. This will also impact the prices of
gold in India too. It is believed that gold prices will steeply rise in coming period of time. The
role of gold in investment has drawn more attention since this transformational economic crisis
began to unfold in 2008 (Fei & Adibe, 2010).

The paper focuses and studies various factors that are attributing towards the increase in its
price with special reference to India. The gold prices in India have shot up more than 900% in
past 10 years, and continue to rise. The results reported in this paper indicate how monetary
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and non monetary factors are contributing towards increase in gold prices and also how it
would affect Indian economy.

5
REVIEW OF LITERATURE

6
LITERATURE REVIEW

Dr. Sindhu( 2013) In study it is concluded that all the select factors like USD, crude oil
prices, repo rate and inflation do have impact on the price of the gold as given in detail their
relationship eith price of the gold in the conclusions part above.

Capie et al., F. Capie, T.C. Mills, G. Wood (2005) show that although gold has served as a
hedge against ûuctuations in the foreign exchange rate of the dollar, it has only done so to a
degree that seems highly dependent on unpredictable political attitudes and events.

Muhammad Shahbaza, Mohammad Iqbal Tahirb, Imran Alia, Ijaz Ur Rehmand (2014)
have applied the ARDL bounds testing approach to co-integration for the long run, and
innovative accounting approach (IAA) to examine the direction of causality in variables to
reveal that “investment in gold is a good hedge against inflation” not only in the long-run but
also in the short-run.

Roger C. Van Tassel(1981) found that the use of gold as a major commodity explains the
long-term real price increase and restrains purely panic-speculative deviations from a trend.

Shahriar Shafieea and Erkan Topalb (2010)estimate gold prices for the next 10 years, based
on monthly historical data of nominal gold price quotations.

Mark Joy( 2011) has three key findings: (i) During the past 23 years gold has behaved as a
hedge against the US dollar. (ii) Gold has been a poor safe haven and (iii) In recent years, gold
has increasingly acted as an effective hedge against currency risk associated with the US
dollar.

Joscha Beckmanna and Robert Czudaj (2013) ponder over the question of gold providing
the ability of hedging against inflation from a new perspective, using data for four major
economies, namely the USA, the UK, the Euro Area, and Japan.

Li Lili and Diao Chengmei (2013) show the dynamics of gold pricing in the New York Gold
Exchang using a dataset that includes global macroeconomic indicators, financial market
indices, quantities and prices of energy products. They find a negative correlation with
financial market indices and macroeconomic indicators whereas the effect of gold reserve and
prices of energy product to gold is positive.

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Chia-Lin Changa, Jui-Chuan Della Changb and Yi-Wei Huangc (2013)examine the inter-
relationships among gold prices in five global gold markets, namely London, New York,
Japan, Hong Kong (which became a Special Administrative Region of China on July 1, 2007),
and Taiwan.

Yu Long (2013) finds the logarithmic gold price time series to appear as a multifractal
Brownian series, the return series of log-gold price appears as a multifractal Gaussian noise
series, the visibility graphs of price series and return series are both small world networks and
the price series is a hierarchy structure in agreement with Elliot’s Wave Theory.

Hsiao-Fen Changa, Liang-Chou Huangb and Ming-Chin Chinc (2013) examine the
correlations of oil prices, gold prices and the NT dollar versus U.S. dollar exchange rate during
2007/09/03–2011/12/28.

8
RATIONALE OF STUDY

9
RATIONALE OF THE STUDY

The purpose of this paper is to examine the causes, resulting in increase in gold prices. This
study also investigates the effects of international business environment, political environment,
market conditions, its induction in commodity market, buying behavior of consumers, and
inflation on gold prices with special reference to India.

10
OBJECTIVE

11
OBJECTIVE OF THE STUDY

The major objectives of the study are:-

1. To study the factors contributing towards the increase in the gold prices in India.

2. To study the impact of increasing gold prices on Indian economy.

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METHODOLOGY

13
METHODOLOGY

Research design

Research type: Exploratory

Dependent Variable

Gold price

Independent Variables

US dollar short term interest rate

US dollar long term interest rate

US real GDP SP 500 Index

Tools and techniques A comparative analysis of various factors has been done on the various
parameters like trend analysis, Standard Deviation, Regression, and correlation to make
possible the tedious task of analysis of these factors. Further analyzing the factors will suggest
the investors that whether it will be profitable for the investors to invest in gold or not.

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HYPOTHESES

1. Hypothesis Assumed (H0): Gold Prices do not depend upon Dollar exchange rate.

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DATA ANALYSIS
&
INTERPRETATION

16
DATA ANLAYSIS
Data Analysis: The factors that impact the price of the gold is given below and also the changes in these factors
on the gold price is studied. US Dollar, Crude oil Price Repo Rates Inflation Rates The analysis of all these
above mentioned factors is as follows:

US DOLLAR: It is an important question that is there any correlation between gold prices and the value of US
DOLLAR. Now the answer depends upon situation and changes with change in global economic scenario.
Nowthere is an inverse relationship between gold prices and US Dollar. Before 1950 US $ was also considered
as the inflation hedge. But this is not true now. So in the past it can observe the positive correlation between
gold prices and US $. But now the relation is negative. US has a large debt (15 trillion $ as on 16th February,
2012) and also it pays more interest than it earns. So it creates a downward pressure on the Dollar and makes
it weak. This creates an inverse relation. As a tool of hedge now gold is demanded more than the US $. When
the price of gold depreciates the investors outside US will benefited because the dollar price of the gold will
increase. Investor can shift away from the dollar denominated assets to gold. Past experiences also that gold
has been used as a hedge against currency risk.

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Significant correlation with R=0.477275. Approximately 22% of variation in gold prices accounted for
with US Dollar value. Significant linear regression with p value=0.000115. Regression Equation is –
Y=22274.4X -55386.6

Here the multiple R value is 0.477 which shows that there is significant correlation between the US
dollar and the gold prices. This tells us that the current scenario of the US dollar does affect the gold
prices. This R value is closer to 0.5 which makes it more significant. Also the value of R square is
0.227 which shows the extent to which the US Dollar value affects the gold prices. But from t value
which is more than the tabulated value (hypothesis is accepted) it can predict that there is a relation
between US $ and gold prices. The –ve intercept of t value as well as –ve intercept of regression
equation shows the inverse relation between the US$ and gold prices.

Therefore the hypothesis is rejected that gold prices do not depend upon the US dollar.
18
FINDINGS

19
FINDINGS

1) Hypothesis Assumed (H0):

Gold Prices do not depend upon Dollar exchange rate. But from t value (-4.136337) which
is more than the tabulated value (3.856547) it can predict that there is a relation between
US $ and gold prices and the hypothesis assumed is rejected. The negative intercept of t
value as well as negative intercept of regression equation shows the inverse relation
between the US$ and gold prices.

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CONCLUSIONS

21
CONCLUSION

In India, gold is one of the foundation assets for Indian households in the form of investment. It is viewed as
secure, liquid investment. Four factors have been considered here which influence the gold prices and the
analysis of these factors reveals that:

 Gold price and Dollar value share an inverse relationship i.e. an increase in gold price will
result in decrease in the Dollar value.
 Gold prices and Crude oil price share a positive correlation which can be understood from the
analysis. It can be inferred that an increase in the gold prices will increase the crude oil prices.
 Gold prices and repo rates are interdependent and also negatively correlated during september-
14 to February-15 i.e. increase in repo rates resulted in decrease gold prices and. But the
correlation remained positive during the other two periods i.e. from November-013 to August-
014 and March-15 to october-16.
 Gold prices and inflation rates are also dependent and positively correlated i.e. increase in
inflation increases gold prices also

From the study it is concluded that all the select factors like USD, crude oil prices, repo rate and
inflation do have impact on the price of the gold as given in detail their relationship eith price of the
gold in the conclusions part above

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REFERENCE

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REFERENCES

 AntoninoParisi, Franco Parisi, David Diaz. Forecasting gold price changes: Rolling and
recursive neural network models, Journal of Multinational Financial Management
2008,18:pp. 477-487.
 Baur and Lucey, D.G. Baur, B.M. Lucey : Is gold a hedge or a safe haven? An analysis
ofstocks, bonds and gold, Financial Review, 2010, pp. 217–229.
 Beckmann and Czudaj, J. Beckmann, R. Czudaj, Gold as an inflation hedge in a time-
varying coefficient framework, North American Journal of Economics and Finance, 24
(2) 2013, pp.208–222
 Blose, L.E. Blose, Gold prices, cost of carry, and expected inflationJournal of
Economics and Business, 62 (1) 2010, pp. 35–47
 Capie et al., F. Capie, T.C. Mills, G. Wood, Gold as a hedge against the dollar, Journal
of International Financial Markets, Institutions and Money, 15 (4) 2005, pp. 343–352
 Chia-Lin Changa, Jui-Chuan DellaChangb and Yi-Wei Huangc, Dynamic price
integration in the global gold market. The North American Journal of Economics and
Finance, Volume 26,December 2013, Pages 227–235.
 Christian Pierdzioch, Marian Risse and Sebastian RohloffThe international business
cycle and gold-price fluctuations, The Quarterly Review of Economics and Finance,
2010
 Chua and Woodward, J. Chua, R.S. Woodward (1982), Gold as an inflation hedge: a
comparative study of six major industrial countries, Journal of Business Finance and
Accounting, 9 (2) (1982), pp. 191–197
 Hsiao-Fen Changa, Liang-Chou Huangb and Ming-Chin Chinc, Interactive
relationshipsbetween crude oil prices, gold prices, and the NT–US dollar exchange
rate—A Taiwanstudy, Energy Policy,Volume 63, December 2013, Pages 441–448.
 JoschaBeckmanna and Robert Czudaj, Gold as an inflation hedge in a time-varying
coefficient framework, The North American Journal of Economics and Finance Volume
24, January 2013, Pages 208–222.

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