Comprehensive Analysis of Gold as a Good

Investment to Diversify a Portfolio

Abstract

This project report is basically done on the gold which is a component

traded in the commodity market. Gold is an inflation hedge & also short-

term fluctuations in Gold offer good potential for trading. It is in the upward

trend and in the current it is safe to invest in the gold.

The basic objective behind the project is analyzing the gold market the

factors affecting it and fluctuation in the gold market. This project report will

help the investors to analyze the right time for investment in the gold. They

will also come to know about the various factors which affect the gold

market. While doing this project the history and the company profile are

basically searched either from the internet or by the literature review of the

company. This means that it is basically based on the secondary source.

Also the topic related concepts are done on the basis of the secondary

sources. The data for the analysis is taken either by the consulting the

company’s employees or from the net. So it is partially primary and partially

secondary. The analysis part is done with the help of Microsoft EXCEL by

computing the required output. Finally the conclusions and

recommendations have been written on the self finding basis.

2
 Table of Contents

P. No
Chapter
5
1) Introduction of the Project.
9
 Objective of the project
13
 Scope of the project
19
 Methodology
23
 Literature Review
26
 Basic terms of Investment
27
 Short term & Long Term Investment Options
30
 History of Gold
30
 Gold as Money
32
 Ways of Investment in Gold

Factors Affecting Gold and Their Analysis

39
 Crude Oil 40
 US Dollar 45
 Repo Rate 49

 Inflation Rate 55

 Bank Failure 59

 Stock Market 60

 Gold Anti Trust Committee 64

 Real Interest Rate 65

 War & Other Crisis 65

3
 Demand & Supply 66

5) Scenario Analysis 69

6) Findings 75

7)Limitations 77

8) Recommendations 78

9) References 80

4
1. INTRODUCTION OF THE PROJECT

Gold – An Investment Paradise

Gold has been synonymous to wealth and prosperity through the ages. The

history of Gold dates back to as early as 4000 BC when the prehistoric men

used it as a tool. Since then Gold has filled the pages of history as the divine

metal that has attracted the attention of men –powerful and otherwise. Gold

was the source of power for the kings. Wars were waged; lives were lost as

kingdoms piled up and hoarded tones of Gold. In the modern history, Gold

became the international currency as the Gold standard came into existence.

Even after the dismantling of Gold standard, Gold existed as the backbone of

international trade and economics as the US accumulated tones of yellow

metal. Till today, Gold has retained its basic use as a commodity without

losing its sheen as a currency.

Gold, because of its ability to protect the wealth of investors can be an ideal

addition to a portfolio. Also the short-term fluctuations in Gold offer good

potential for trading. Gold has been on its long-term upwards trajectory which

began in early 2001. This long-term move has been punctuated by short-term

pullbacks offering opportunities for late entrants to join the bandwagon. With

the US economy outgrowing the league of developed nations during the last

5
two years coupled with the worsening of long-term structural weaknesses and

the subsequent movements in the USD have moved the focus away from

Gold’s use as a commodity. However the long-term fundamentals of the

yellow metal have also undergone a significant change with the mining output

falling quite steadily during the last decade coupled with an evergreen

demand especially from Asia.

This report analyses the long-term and short-term fundamental factors

expected to move Gold prices. We believe that the short-term weakness

expected in gold is a great opportunity for the late-comers to join the great

Gold. Strategically, gold is one of the two most important commodities on

the planet along with crude oil. Gold has been historically recognized as the

ultimate store of value and method of payment. The following

characteristics of Gold have enabled it play this role:

 It is durable, homogenous and divisible

 Gold’s rarity gives it intrinsic value and that value is high per unit of

volume.

 Its value is recognized across the globe and is traded in a continuous

market.

6
 Gold is the only financial medium of exchange that is not someone else’s

liability.

In updating our price outlook, we have considered the following

factors:

 Investment demand will continue to be the prime driver for the rally in Gold

prices,

 As economic factors will make gold more attractive compared to other

financial assets.

 Furthermore strong buying support from the Central Banks of Russia,

China and

Middle East countries will help support the rally in Gold prices.

 Mine production will not be able to meet current demand due to lack of

new discoveries.

 The long term average in the Crude/Gold ratio has been around 16 times,

but is Currently only around 10 times.

In the remaining part of this report we will consider the major factors that

are likely to drive Gold prices higher in the near future.

7
1.2. Objectives of the project

The objective of my project is:

 To study the current investment scenario

 To analyze the different options available for investment options

 To overview the different ways of investment in gold

 To acquaint the investor with the factors that affects the investment

scenario in gold.

 To have the extensive overview on the working system of UNICON

COMMODITY SECTION.

 To analyze the different factors which affect the gold market and suggest

the investors about the right time to invest in gold.

 Also see that is it the right time to invest in gold or not.

1.3. Scope of the study

The analysis of the factors which affect the prices of gold and the

investment decisions in gold. A comparative analysis of these factors has

been done on the various parameters like Standard Deviation, Regression;

correlation to make possible the tedious task of analysis of these factors.

8
 Further analyzing the factors will suggest the investors that whether it will

be profitable for the investors to invest in gold or not.

1.4. Methodology

 The history and the company profile are basically searched either from the

internet or by the literature review of the company. This means that it is

basically based on the secondary source. Also the topic related concepts

are done on the basis of the secondary sources.

 The data for the analysis is taken either by the consulting the company’s

employees or from the net. So it is partially primary and partially secondary.

 The analysis part is done with the help of Microsoft EXCEL by computing

the required output.

 Finally the conclusions and recommendations has been written on the self

finding basis.

1.5. Literature Review:

 Robert Preachter historical report on Gold and silver has been studied

 Sites like uniconindia@co.in, mcxindia.in, gold research.org, etc has been

studied.

 The literature review of the commodity section of Unicon.

9
  Annual report published by RBI & World Gold Council

1.6. Basic Descriptive terms:

Investment:

The money you earn is partly spent and the rest saved for meeting future

Expenses. Instead of keeping the savings idle, you may like to use savings

in Order to get return on it in the future. This is called Investment.

Reasons for investment:

One needs to invest to:

 Earn return on your idle resources

 Generate a specified sum of money for a specific goal in life

 Make a provision for an uncertain future

It is also to meet the cost of Inflation. Inflation is the rate at which the cost

of living increases. The cost of living is simply what it costs to buy the

goods and services you need to live. Inflation causes money to lose value

because it will not buy the same amount of a good or a service in the

future, as it does now or did in the past. This is why it is important to

consider inflation as a factor in any long-term investment strategy. The aim

of investments should be to provide a return above the inflation rate to

ensure that the investment does not decrease in value.

10
 Right time for investment:

The sooner one starts investing the better. By investing early we allow our

Investments more time to grow, whereby the concept of compounding

increases your income, by accumulating the principal and the interest or

dividend earned on it, year after year. The three golden rules for all

investors are:

 Invest early

 Invest regularly

 Invest for long term and not short term

Various options available for investment:-

One may invest in:

 Physical assets like real estate, gold/ jewellery, commodities etc.

 Financial assets such as fixed deposits with banks, small saving

instruments with post offices, insurance/provident/pension fund etc. or

securities market related instruments like shares, bonds, debentures etc.

Short-term financial options available for investment:

Savings Bank Account is often the first banking product people use,

which offers low interest (4%-5% p.a.), making them only marginally better

than fixed deposits.

11
Money Market or Liquid Funds are a specialized form of mutual funds

that invest in extremely short-term fixed income instruments and thereby

provide easy liquidity. Unlike most mutual funds, money market funds are

primarily oriented towards protecting your capital and then, aim to

maximize returns. Money market funds usually yield better returns than

savings accounts, but lower than bank fixed deposits.

Fixed Deposits with Banks are also referred to as term deposits and

minimum investment period for bank FD is 30 days. Fixed Deposits with

banks are for investors with low risk appetite, and may be considered 6-12

months investment period as normally interest less than 6 months bank

FDs is likely to be lower than money market returns

*Long-term financial options available for investment:

Post Office Savings: Post Office Monthly Income Scheme is a low risk

saving instrument, which can be availed through any post office. It provides

an interest rate of 8% per annum, which is paid monthly. Minimum amount,

which can be invested, is Rs. 1,000/- and additional investment in multiples

of 1,000/-. Maximum amount is Rs. 3, 00,000/- (if Single) or Rs. 6, 00,000/-

(if held jointly) during a year. It has a maturity period of 6 years. Premature

Withdrawal is permitted if deposit is more than one year old. A Deduction of

5% is levied from the principal amount if withdrawn prematurely.

12
Public Provident Fund: A long-term savings instrument with a maturity of

15 years and interest payable at 8% per annum compounded annually. A

PPF account can be opened through a nationalized bank at anytime during

the year and is open all through the year for depositing money. Tax

benefits can be availed for the amount invested and interest accrued is tax-

free. A withdrawal is permissible every year from the seventh financial year

of the date of opening of the account and the amount of withdrawal will be

limited to 50% of the balance at credit at the end of the 4th year

immediately preceding the year in which the amount is withdrawn or at the

end of the preceding year whichever is lower the amount of loan if any.

Company Fixed Deposits: These are short-term (six months) to medium-

term (three to five years) borrowings by companies at a fixed rate of

interest, which is payable monthly, quarterly, semiannually or annually.

They can also be cumulative fixed deposits 10 where the entire principal

along with the interest is paid at the end of the loan period. The rate of

interest varies between 6-9% per annum for company FDs. The interest

received is after deduction of taxes.

Bonds: It is a fixed income (debt) instrument issued for a period of more

than one year with the purpose of raising capital. The central or state

government, corporations and similar institutions sell bonds. A bond is

13
generally a promise to repay the principal along with a fixed rate of interest

on a specified date, called the Maturity Date.

Mutual Funds: These are funds operated by an investment company,

which raises money from the public and invests in a group of assets

(shares, debentures etc.), in accordance with a stated set of objectives. It is

a substitute for those who are unable to invest directly in equities or debt

because of resource, time or knowledge constraints. Benefits include

professional money management, buying in small amounts and

diversification. Mutual fund units are issued and redeemed by the Fund

Management Company based on the fund's net asset value (NAV), which

is determined at the end of each trading session. NAV is calculated as the

value of all the shares held by the fund, minus expenses, divided by the

number of units issued. Mutual Funds are usually long term investment

vehicle though there some categories of mutual funds, such as money

Market mutual funds, which are short-term instruments.

14
History of Gold:

Gold was first discovered as shining, yellow nuggets. Gold became a part

of every human culture. Its brilliance, natural beauty, and luster, and its

great malleability and resistance to tarnish made it enjoyable to work and

play with.

Gold is the easiest of the metals to work. It occurs in a virtually pure

and workable state, whereas most other metals tend to be found in ore-

bodies that pose some difficulty in smelting. Gold's early uses were no

doubt ornamental, and its brilliance and permanence (it neither

corrodes nor tarnishes) linked it to deities and royalty in early

civilizations

Gold as Money:

Gold, measured out, became money. Gold's beauty, scarcity, unique

density (no other metal outside the platinum group is as heavy), and the

ease by which it could be melted, formed, and measured made it a natural

trading medium. Gold gave rise to the concept of money itself: portable,

private, and permanent. Gold (and silver) in standardized coins came to

replace barter arrangements, and made trade in the Classic period much

easier.

15
Gold was money in ancient Greece. The Greeks mined for gold throughout

the Mediterranean and Middle East regions by 550 B.C., and both Plato

and Aristotle wrote about gold and had theories about its origins. Gold was

associated with water (logical, since most of it was found in streams), and it

was supposed that gold was a particularly dense combination of water and

sunlight.Their science may have been primitive, but the Greeks learned

much about the practicalities of gold mining. By the time of the death of

Alexander of Macedon (323 B.C.), the Greeks had mined gold from the

Pillars of Hercules (Gibraltar) all the way eastward to Asia Minor and Egypt,

and we find traces of their placer mines today. Some of the mines were

owned by the state, some were worked privately with a royalty paid to the

state. Also, nomads such as the Scythians and Cimmerians worked placer

mines all over the region. The surviving Greek gold coinage and Scythian

jewelry both show superb artistry.

The Roman Empire furthered the quest for gold. The Romans mined gold

extensively throughout their empire, and advanced the science of gold-

mining considerably. They diverted streams of water to mine hydraulically,

and built sluices and the first 'long toms.' They mined underground, also,

and introduced water-wheels and the 'roasting' of gold-bearing ores to

separate the gold from rock. They were able to more efficiently exploit old

16
mine-sites, and of course their chief laborers were prisoners of war, slaves,

and convicts. A monetary standard made the world economy possible. The

concept of money, (i.e., gold and silver in standard weight and fineness

coins) allowed the World's economies to expand and prosper. During the

Classic period of Greek and Roman rule in the western world, gold and

silver both flowed to India for spices, and to China for silk. At the height of

the Empire (A.D. 98-160), Roman gold and silver coins reigned from Britain

to North Africa and Egypt.

Money had been invented. Its name was gold.

17
Ways of investment in gold:

Coins and small bars

Bullion coins and small bars offer private investors an attractive way of

investing in relatively small amounts of gold. In many countries - including

the whole of the European Union - gold purchased for investment purposes

is exempt from Value Added Tax.

Bullion coins

These coins are legal tender in their country of issue for their face value,

rather than for their gold content. For investment purposes, the market

value of bullion coins is determined by the value of their fine gold content,

plus a premium or mark-up that varies between coins and dealers. The

premium tends to be higher for smaller denominations. It is important not to

confuse bullion coins with commemorative or numismatic coins, whose

18
value depends on their rarity, design and finish rather than on their fine

gold content.

Small gold bars

Gold bars can be bought in a variety of weights and

sizes, ranging from as little as one gram to 400 troy

ounces (the size of the internationally traded London

Good Delivery bar). Small bars are defined as those weighing 1000g or

less. According to industry specialists Gold Bars Worldwide, there are 94

accredited bar manufacturers and brands in 26 countries, producing a total

of more than 400 types of standard gold bars between them. They normally

contain a minimum of 99.5% fine gold. The Gold Bars Worldwide website

provides a wealth of additional information regarding the international gold

bar market.

Gold-backed securities:

Gold is traded in the form of securities on stock exchanges in Australia,

France, Hong Kong, Japan, Mexico, Singapore, South Africa, Switzerland,

Turkey, the United Kingdom and the United States. By design, these forms

of securitized gold investment, all regulated financial products, are

generally referred to as Exchange Traded Commodities or Exchange

19
Traded Funds (ETFs), and are expected to track the gold price almost

perfectly. Unlike derivative products, the securities are 100% backed by

physical gold held mainly in allocated form.

20
Gold futures

Gold futures contracts are firm commitments to make or take delivery of a

specified quantity and purity of gold on a prescribed date at an agreed

price. The initial margin - or cash deposit paid to the broker - is only a

fraction of the price of the gold underlying the contract. That means

investors can achieve notional ownership of a value of gold considerably

greater than their initial cash outlay. While this leverage can be the key to

significant trading profits, it can also give rise to equally significant losses in

the event of an adverse movement in the gold price. Futures prices are

determined by the market's perception of what the carrying costs -

including the interest cost of borrowing gold plus insurance and storage

charges - ought to be at any one time. The futures price is usually higher

than the spot price for gold. Futures contracts are traded on regulated

commodity exchanges.

21
Gold options

These give the holder the right, but not the obligation, to buy ('call' option)

or sell ('put' option) a specified quantity of gold at a predetermined price by

an agreed date. The cost of such an option depends on the current spot

price of gold, the level of the pre-agreed price (the 'strike price'), interest

rates, the anticipated volatility of the gold price and the period remaining

until the agreed date. The higher the strike price, the less expensive a call

option and the more expensive a put option. Like futures contracts, buying

gold options can give the holder substantial leverage. Where the strike

price is not achieved, there is no point in exercising the option and the

holder' loss is limited to the premium initially paid for the option. Like

shares, both futures and options can be traded through broker

Warrants

In the past, gold warrants were mostly related to the shares of gold mining

companies. Nowadays commonly used by leading investment banks, they

give the buyer the right to buy gold at a specific price on a specific day in

the future. For this right, the buyer pays a premium. Like futures, warrants

are generally leveraged to the price of the underlying assets.

22
Gold Allocated account

Effectively like keeping gold in a safety deposit box, this is the most secure

form of investment in physical gold. The gold is stored in a vault owned and

managed by a recognized bullion dealer or depository. Specific bars (or

coins, where appropriate), which are numbered and identified by hallmark,

weight and fineness, are allocated to each particular investor, who pays the

custodian for storage and insurance. The holder of gold in an allocated

account has full ownership of the gold in the account, and the bullion dealer

or depository that owns the vault where the gold is stored may not trade,

lease or lend the bars except on the specific instructions of the account

holder.

Gold Unallocated account

Traditionally, one advantage of unallocated accounts has been the lack of

any storage and insurance charges, because the bank reserves the right to

lease the gold out. Now that the gold lease rate is negative in real terms,

some banks have begun to introduce charges even on unallocated

accounts. Investors are exposed to the creditworthiness of the bank or

dealer providing the service in the same way as they would be with any

other kind of account. As a general rule, bullion banks do not deal in

quantities under 1000 ounces - their customers are institutional investors,

23
private banks acting on behalf of their clients, central banks and gold

market participants wishing to buy or borrow large quantities of gold.

Gold pool accounts

There are alternatives for investors wishing to open gold accounts holding

less than 1000 ounces.

Electronic currencies

There are also electronic 'currencies' available - linked to gold bullion in

allocated storage - which offer a simple and cost-effective way of buying

and selling gold, and using it as money. Any amount of gold can be

purchased, and these currencies allow gold to be used to send online

payments worldwide.

Gold Accumulation Plans

Gold Accumulation Plans (GAPs) are similar to conventional savings plans

in that they are based on the principle of putting aside a fixed sum of

money every month. GAPs is different from ordinary savings plans is that

the fixed sum is invested in gold. A fixed sum of money is- withdrawn

automatically from an investor's bank account every month and is used to

buy gold every trading day in that month. The fixed monthly sums can be

24
small, and purchases are not subject to the premium normally charged on

small bars or coins. Because small amounts of gold are bought over a long

period of time, there is less risk of investing a large sum of money at the

wrong time. At any time during the contract term (usually a minimum of a

year), or when the account is closed, investors can get their gold in the

form of bullion bars or coins, and sometimes even in the form of Jewellery.

If they choose to sell their gold, they can also get cash.

Gold certificates

Historically, gold certificates were issued by the U.S. Treasury from the civil

war until 1933. Denominated in dollars, these certificates were used as part

of the gold standard and could be exchanged for an equal value of gold.

These U.S. Treasury gold certificates have been out of circulation for many

years, and they have become collectibles. They were initially replaced by

silver certificates, and later by Federal Reserve notes.

Nowadays, gold certificates offer investors a method of holding gold without

taking physical delivery. Issued by individual banks, particularly in countries

like Germany and Switzerland, they confirm an individual's ownership while

the bank holds the metal on the client's behalf. The client thus saves on

storage and personal security issues, and gains liquidity in terms of being

25
able to sell portions of the holdings (if need be) by simply telephoning the

custodian. It runs a certificate programme that is guaranteed by the

government of Western Australia and is distributed in a number of

countries.

Gold orientated funds

A number of collective investment vehicles specialize in investing in the

shares of gold mining companies. The term "collective investment vehicles"

as used here should be taken to include mutual funds, open-ended

investment companies (OEICs), closed-end funds, unit trusts, and any

similar structures. A wide range of such funds exists and they are domiciled

in a number of different countries. These funds are regulated financial

products and as such it is not possible here to provide details on any

specific funds. Funds are likely to differ in their structure - some may invest

simply in the shares of gold mining companies, some may invest in

companies that mine minerals other than gold, some may invest in futures

as well as mining equities and some may invest partly in mining equities

and partly in the underlying metal (s).It would be misleading to equate

investment in a gold mining equity with direct investment in gold bullion as

there are some significant differences. The appreciation potential of a gold

26
 mining company share depends on market expectations of the future price

of gold, the costs of mining it, the likelihood of additional gold discoveries

and several other factors. To a degree, therefore, the success of the

investment depends on the future earnings and growth potential of the

company. Most gold mining equities tend to be more volatile than the gold

price. While they are subject to the same risk factors that influence the

prices of most other equities there are additional risks linked to the mining

industry in general and to individual mining companies specifically.

Structured products

The market for structured products is dominated by institutional investors -

or, in the case of forwards, by gold market professionals - because the

minimum investment can be high. The following is a general overview of

what these products are like and how they work.

 Forwards

Like futures, forward contracts are agreements to exchange an underlying

asset - in this case, gold - at an agreed price at some future date. They can

therefore be used either to manage risk or for speculative purposes. But

there are important differences between forwards and options traded in the

27
 over-the-counter (OTC) gold market on the one hand, and futures and

options traded on one of the exchanges on the other.

 a forward contract (or OTC option) is negotiated directly between

counterparties and is therefore tailor-made, whereas futures contracts are

standardized agreements that are traded on an exchange

 although forward contracts offer a greater flexibility and are private

agreements, there is a degree of counterparty risk, whereas futures

contracts are guaranteed by the exchange on which they are traded

 Because futures contracts can be sold to third parties at any point before

maturity, they are more liquid than forward contracts (whose obligations

cannot be transferred).

 Gold-linked bonds and structured notes

Gold-linked bonds are available from the world's largest bullion dealers and

investment banks. Their products provide investors with some combination

of:

 exposure to gold price fluctuations

 a yield

 Principal protection.

28
Structured notes tend to allocate part of the sum invested to purchasing

put/call options (depending on whether the product is designed for gold

bulls or bears). The balance is invested in traditional fixed income products,

such as the money market, to generate a yield. They can be structured to

provide capital protection and a varying degree of participation in any price

appreciations depending on market conditions and investor preferences.

29
DATA ANALYSIS

Factors affecting price of gold and their analysis

1. Crude Oil-

The crude oil is one of the factors for inflation. As the prices of crude oil

increases there is upward pressure on inflation. In order to hedge against

the inflation people invest in gold . so we can say that there is no direct

relationship between gold and crude oil prices. It will be more clear from the

following discussion.

Gold has almost always been the most-highly-sought-after universal store

of wealth. The seemingly magical yellow metal is the de facto standard by

which every other form of money and wealth in history has been measured.

Empires and currencies rise and fall, but gold stands strong, monolithic and

proud, casting an enormous shadow over all of monetary history. So we

can say that the gold is the king of all the currencies. Where as the demand

for crude oil is in elastic. Now paper currencies loose their purchasing

power with time but this doesn’t happen with the gold. So during inflationary

period when other currencies loose their value more gold can be purchased

with gold due to its purchasing power stability.

So during high crude oil prices, high inflation, and decling equity market

gold can be stored to hedge the inflation.

30
Analysis:

Date Gold Crude Date Gold Crude

oil oil

May-10 6104.576 2162.145 May- 8863.392 2593.224

12

Jun-10 6185.849 2448.941 Jun- 8690.265 2739

12

Jul-10 6173.774 2550.24 Jul- 8732.315 2988.308

12

Aug-10 6276.731 2811.12 Aug- 8829.425 2950.413

12

Sep-10 6574.167 2890 Sep- 9286.778 3197.846

12

Oct-10 6889.167 2799.087 Oct- 9671.96 3357.95

12

Nov-10 7174.826 2658.758 Nov- 10301.33 3735.319

12

Dec-10 7610.6 2712.404 Dec- 10247.9 3512.764

31
 12

Jan-11 7957.714 2910.925 Jan- 11264.54 3686.8

08

Feb-11 7998 2737.923 Feb- 11857.93 3755.872

08

Mar-11 8246.146 2797.556 Mar- 12609.42 4166.343

08

Apr-11 8958.111 3123.673 Apr- 11792.93 4479.091

08

May-11 9988.8 3212.491 May- 12142.66 5272.683

08

Jun-11 8896.447 3262.516 Jun- 12327.35 5726.128

08

Jul-11 9513.714 3456.657 Jul- 13010.86 5757.04

08

Aug-11 9572.941 3401.893 Aug- 11791 5037.213

08

Sep-11 9029.255 2956.86 Sep- 12194.02 4723.304

08

32
Oct-11 8703.302 2683.683 Oct- 12715 3748.739

08

Nov-11 9167.857 2589.456 Nov- 12108.59 2846.875

08

Dec-11 9152.87 2776.262 Dec- 12865.25 2266.143

08

Jan-12 9122.782 2412.615 Jan- 13475.67 2125.2

09

Feb-12 9494.511 2615.884 Feb- 14791.53 1977.682

09

Mar-12 9345.75 2665.638 Mar- 15254.53 2452.408

09

Apr-12 9311.894 2711.61 Apr- 14491.34 2526.794

09

May- 14559.66 2859.558

09

33
 Trend Analysis of Crude Oil trend analysis of gold

7000 18000
6000 16000
14000
5000
12000
prices

prices
4000 10000
3000 8000
6000
2000
4000
1000 2000
0 0
Aug-04 Feb-05 Sep-05 Mar-06 Oct-06 Apr-07 Nov-07 Jun-08 Dec-08 Jul-09 Jan-10 Aug-04 Feb-05 Sep-05 Mar-06 Oct-06 Apr-07 Nov-07 Jun-08 Dec-08 Jul-09 Jan-10
Months months

12000

10000

8000
Gold
6000
Crude oil

4000

2000

0
5 05 5 06 6 06 6 07
-0 g- v-0 b- -0 g- v-0 b-
ay u No F e ay u No F e
M A M A

The above sheet and diagram shows the change in gold and crude oil

prices at different dates with fixed intervals.

34
Hypothesis Assumed (H0) : Gold prices do not depend on crude oil prices

Alternative Hypothesis (H1):Gold prices depend on crude oil prices.

Regression

Statistics

Multiple R 0.328567618

R Square 0.107956679

Adjusted R

Square 0.088977034

Standard Error 2329.254449

Observations 49

ANOVA

Significanc

Df SS MS F eF

Regressio 30859955.6 30859955.6 5.68802

n 1 7 7 4 0.02116642

Residual 47 254995035. 5425426.28

35
 6 9

285854991.

Total 48 2

Coefficie Standard T stat p-value Lower Upper

nts Error 99% 99%

Interce 7170.203 1242.765 5.7695 5.99861E 3833.931 10506.475

pt 075 092 56 -07 075 07

X 0.898366 0.376680 2.3849 0.021166 0.112852 1.9095858

variabl 666 305 58 561 93

e1

Tabulated value of z- 2.56

36
Analysis overview:

Significant correlation with r -0.3286

Approx 11% of variation in gold prices accounted for with crude oil.

Significant linear regression with p value- 0.0212

Regression Equation- Y=0.90 X+ 7170.2031

Interpretation- Here multiple R is 0.3256 which shows that there is

correlation between predicted gold prices and Actual one but it is closer to

0 which shows that the correlation is not significant. It can also be

interpretated from the R square value which is only 0.10 which shows

insignificance correlation. By R square we can say that variation in crude oil

prices accounts for only 11% (approx) for the variation in the prices in gold.

Also the t value is (2.39) less than the tabulated value (2.56) which shows

that the null Hypothesis is accepted. Therefore we can say that the crude

oil prices don’t affect the prices of gold significantly.

Here it is important to know that there is great impact of the current

economic scenario. We can analyze from the graph and the table that there

is more correlation in some time period. But since there is an indirect

relationship, so it is not important to analyze the time period separately.

37
2. US Dollar-

It is an important question that is their 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.

Now there is a 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 we can observe the positive correlation

between gold prices and US $. But now the relation is negative. US has a

large debt (3 trillion $) and also it pays more interest than it earns. So it

creates a downward pressure on the Dollar and makes it weak. This

creates a 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.

38
Analysis-

Date Gold dollar Date Gold Dollar

May-

May-05 6104.576 43.69 07 8863.392 40.73

Jun-

Jun-05 6185.849 43.51 07 8690.265 40.75

Jul-

Jul-05 6173.774 43.49 07 8732.315 40.44

Aug-

Aug-05 6276.731 44.04 07 8829.425 40.96

Sep-

Sep-05 6574.167 43.99 07 9286.778 39.74

Oct-

Oct-05 6889.167 45.11 07 9671.96 39.32

Nov-

Nov-05 7174.826 45.92 07 10301.33 39.67

Dec-

Dec-05 7610.6 45.07 07 10247.9 39.41

39
 Jan-

Jan-06 7957.714 44.07 08 11264.54 39.39

Feb-

Feb-06 7998 44.44 08 11857.93 39.92

Mar-

Mar-06 8246.146 44.61 08 12609.42 39.97

Apr-

Apr-06 8958.106 44.97 08 11792.93 40.46

May-

May-06 9988.8 46.43 08 12142.66 42.59

Jun-

Jun-06 8896.447 46.08 08 12327.35 42.95

Jul-

Jul-06 9513.714 46.51 08 13005.86 42.49

Aug-

Aug-06 9572.941 46.55 08 11791 43.79

Sep-

Sep-06 9029.255 45.96 08 12194.02 46.94

Oct-06 8703.302 45.02 Oct- 12715 49.25

40
 08

Nov-

Nov-06 9167.857 44.76 08 12108.59 49.84

Dec-

Dec-06 9152.87 44.23 08 12865.25 48.45

Jan-

Jan-07 9072.782 44.17 09 13475.67 49.02

Feb-

Feb-07 9494.511 44.31 09 14791.53 50.73

Mar-

Mar-07 9345.75 43.59 09 15254.53 50.95

Apr-

Apr-07 9311.894 41.29 09 14491.34 50.22

May-

09 14559.66 47.29

41
 Dollar exchange rate
60

50

40

30

20

10

Jan-10
0
dollar
Gold

May-09
Apr-09
Mar-09
Feb-09

Aug-04 Feb-05 Sep-05 Mar-06 Oct-06 Apr-07 Nov-07 Jun-08 Dec-08 Jul-09
Jan-09
Dec-08
Nov-08
Oct-08
Sep-08
Aug-08
Jul-08
Jun-08
May-08
Apr-08
Mar-08
Feb-08
Jan-08
Dec-07
Nov-07
Oct-07
Gold vs US dollar

Sep-07

trend analysis of US $
Aug-07
Jul-07
month

month

Months
Jun-07
May-07
Apr-07

42
Mar-07
Feb-07
Jan-07
Dec-06
Nov-06
Oct-06
Sep-06
Aug-06
Jul-06
Jun-06
May-06
Apr-06
Mar-06
Feb-06
Jan-06
Dec-05
Nov-05
Oct-05
Sep-05
Aug-05
Jul-05
Jun-05
May-05

0
18000
16000
14000
12000
10000
8000
6000
4000
2000

60
50
40
30
20
10
0
gold prices Exchange rate
Hypothesis Assumed (H0): Gold Prices do not depend upon Dollar

exchange rate.

Alternative Hypothesis(H1):Gold prices depend upon Dollar exchange

rate.

Regression

Statistics

Multiple R 0.360509804

R Square 0.129967319

Adjusted R

Square 0.111455985

Standard Error 2300.338479

Observations 49

Df SS MS F Significance

Regression 1 37151806.78 37151806.78 7.020959231 0.010939488

Residual 47 248703184.5 5291557.116

Total 48 285854991.2

43
 Coefficien Standard T stat p-value Lower Upper

ts Error 99% 99%

Interce - 4582.615 - 0.651153 - 10216.87

pt 2085.4120 959 0.4550702 944 14387.699 537

12 11 39

X 273.85034 103.3510 2.6497092 0.651153 - 551.3021

variabl 96 93 73 944 3.6014069 061

e1 83

Tabulated value of z- 2.56

Analytical Overview:

Significant correlation with r -0.36051

Change in US $ exchange rate accounts only 13% for the change in

gold prices.

44
Significant linear regression with p value- 0.6512

Regression Equation- Y=273.85 X-2085.412

Interpretation:Here the value of multiple R value which is 0.36, shows that

the correlation between the US $ and Gold prices is insignificant. This

shows that in the current scenario the US $ exchange rate doesn’t affect

the gold prices significantly. This is because R value is less than 0.5 and

more closer to 0. Also the value of R square is 0.13 which shows the extent

at which Fluctuation in US $ affects Gold prices.

But from t value which is more than the tabulated value (hypothesis is

accepted) we 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.

Also for time period May 05 to Oct 06 there is high correlation (0.82) & t

value is 5.8 which makes the hypothesis to be accepted. This tells that due

to the change in the global economic scenario the effect of US $ on gold

prices is decreasing.

45
Now by doing the regression analysis for year 08 to 09 (value of multiple

R=.71 , t value=3.98) we can also predict that the there is improvement in

the scenario and again the correlation is being establishing. So there is

great impact of the current economic scenario.

3. REPO RATE:

Repo Rate is that rate at which the commercial banks borrow money from

the RBI. It is a good measure to control inflation. When the repo rate will be

high, the borrowing from the banks will be low which will actually reduce the

purchasing power of the public. This will reduce the investment in gold and

it will ultimately reduce the price the gold.

Analysis:

Repo Repo

Date Gold rate Date Gold rate

Jun-

May-05 6104.576 6 07 8690.265 7.75

Jun-05 6185.849 6 Jul- 8732.315 7.75

46
 07

Aug-

Jul-05 6173.774 6 07 8829.425 7.75

Sep-

Aug-05 6276.731 6 07 9286.778 7.75

Oct-

Sep-05 6574.167 6 07 9671.96 7.75

Nov-

Oct-05 6889.167 6.25 07 10301.33 7.75

Dec-

Nov-05 7174.826 6.25 07 10247.9 7.75

Jan-

Dec-05 7610.6 6.25 08 11264.54 7.75

Feb-

Jan-06 7957.714 6.5 08 11857.93 7.75

Mar-

Feb-06 7998 6.5 08 12609.42 7.75

Apr-

Mar-06 8246.146 6.5 08 11792.93 7.75

47
 May-

Apr-06 8958.106 6.5 08 12142.66 7.75

Jun-

May-06 9988.8 6.5 08 12327.35 8.5

Jul-

Jun-06 8896.447 6.75 08 13005.86 9

Aug-

Jul-06 9513.714 7 08 11791 9

Sep-

Aug-06 9572.941 7 08 12194.02 9

Oct-

Sep-06 9029.255 7 08 12715 6.5

Nov-

Oct-06 8703.302 7 08 12108.59 6.5

Dec-

Nov-06 9167.857 7.25 08 12865.25 6.5

Jan-

Dec-06 9152.87 7.25 09 13475.67 6.5

Jan-07 9072.782 7.25 Feb- 14791.53 5.75

48
 09

Mar-

Feb-07 9494.511 7.5 09 15254.53 5

Apr-

Mar-07 9345.75 7.5 09 14491.34 4.75

May-

Apr-07 9311.894 7.75 09 14559.66 4.75

May-07 8863.392 7.75

49
 43
Prices
repo rate in %

10000
12000
14000
16000
18000

0
2000
4000
6000
8000

0
2
4
6
8
10
May -05
J un-0 5
J ul-05

Jan-04
Aug-05
Sep-05
Oc t- 05
No v-0 5
De c-0 5
J an-0 6
Feb-06
Mar- 06

May-05
Apr- 06
May -06
J un-0 6
J ul-06
Aug-06
Sep-06
Oc t- 06
No v-0 6

Oct-06
De c-0 6
J an-0 7
Feb-07
Mar- 07
Apr- 07
May -07

time period
J un-0 7

month
month

J ul-07

Feb-08
Aug-07
Sep-07

50
Oc t- 07
No v-0 7
De c-0 7
J an-0 8
Feb-08
Mar- 08
Gold prices VS Repo rate

Jul-09
Apr- 08
May -08
J un-0 8
J ul-08

Trend Analysis of Repo rate

Aug-08
Sep-08
Oc t- 08
No v-0 8

Nov-10
De c-0 8
J an-0 9
Feb-09
Mar- 09
Apr- 09
May -09
0
1
2
3
4
5
6
7
8
9
10

repo rate value

Repo rate
Gold

Linear (Repo rate)

Repo rate
 Hypothesis Assumed:(H0)- The Repo rate doesn’t affect the gold

prices.

Alternate Hypothesis (H1)- The Repo rate affect the gold prices.

*NOTE- By analyzing the graph and table we can observe that there are

three time periods.

 One that is there is continuous increase in the gold prices with the increase

in time period

 2nd is that period in which there is increase in gold prices but there is no

change in repo rate.

 Last is that period in which there is decrease in repo rate but increase in

gold prices.

So it will be better that we will show the regression analysis separately in

three different parts.

Regression Analysis for the whole period:

Multiple R 0.044010528

R Square 0.001936927

51
Adjusted R -

Square 0.019298458

Standard

Error 2463.785839

Observations 49

ANOVA

Significance

Df SS MS F F

Regression 1 553680.1381 553680.138 0.091212222 0.763974109

Residual 47 285301311.1 6070240.66

Total 48 285854991.2

Standard Lower U

Coefficients Error T Stat P-value 99.0% 9

Intercept 9270.172641 2527.017003 3.668425115 0.000621127 2486.254969 1

X 107.96492 357.4836224 0.302013612 0.763974109 - 1

52
Variable 851.7197437

Regression Analysis for the period of May 05 to Sep 09:

Multiple R 0.85704807

R Square 0.734531395

Adjusted R

Square 0.727724508

Standard

Error 982.2792188

Observations 41

ANOVA

df SS MS F Significance

53
 F

Regressio 104119413. 104119413. 107.910027

n 1 9 9 3 8.6124E-13

3 37630026.0 964872.463

Residual 9 9 8

Total 0 141749440

Standard Lower

Coefficients Error t Stat P-value 99.0%

- - -

Intercept 4542.661702 1340.687899 3.388306633 0.001619293 8173.12813

X Variable 1 1911.568612 184.0174421 10.38797513 8.6124E-13 1413.26535

Regression Analysis for the period of Oct 08 to may 09 :

54
Multiple R 0.838340857

R Square 0.702815392

Adjusted R

Square 0.653284624

Standard

Error 673.8858348

Observations 8

ANOVA

Significan

Df SS MS F ce F

Regressio 6443752. 6443752.5 14.189470 0.0093227

n 1 59 87 91 06

2724732. 454122.11

Residual 6 71 83

Total 7 9168485.

55
 3

Standard Lower

Coefficients Error t Stat P-value 99.0%

Intercept 20477.82011 1793.258299 11.41933658 2.70487E-05 13829.4440

- - -

X Variable 1 1158.075451 307.4353158 3.766891412 0.009322706 2297.86975

Interpretation:

Now here we have divided the regression analysis in three parts. The

overview of the 1st part, 2nd part and the 3rd part are as below:

1. Significant correlation with r -0.044010528

Change in repo rate accounts 2 % for the change in gold prices.

Significant linear regression with p value- 0.763974109

56
Regression Equation- Y= 107.96492X+9270.172641

2. Significant correlation with r –0.85704807

Change in Repo rate accounts for the change73% in gold prices.

Significant linear regression with p value- (Approx) 0.00

Regression Equation- Y= 1911.568612X-4542.661702

3. Significant correlation with r -0.838340857

Change in repo rate accounts 70 % for the change in gold prices.

Significant linear regression with p value- 0.009322706

Regression Equation- Y= -1158.075451X+20477.82011

Now the three cases are contradicting to each other. Case 1 shows the

poor correlation where as case 2 & 3 shows the stronger correlation. Also

the t-value and p-value shows that the hypothesis should be accepted

(case 2 & 3) but according to case 1 the hypothesis should be rejected.

Therefore, the question is why here such contradiction arises. The answer

could be found by observing the graphs of this section. We can easily

57
observe that in the period (which relates to the 2nd case-sep-08 to oct-08)

there is a sharp downfall in the repo rate which is affect of crisis in the

economy and inflation rate downfall in this period.

So we can say that there is a high correlation between repo rate and gold

prices, being other economic factors constant. By generalizing the case 2

and 3 where multiple R values are .86 and .84 we can say that the there is

significant correlation between gold prices and repo rate. Also the t-values

are 10.38 and -3.76 which shows the acceptance of hypothesis. –ve sign

only shows the inverse correlation within that period.

4. Inflation Rate-

Gold has always been considered a good hedge against inflation. Rising

inflation rates typically appreciates gold prices. Traditional theory implies

that the relative price of consumer goods and of such real assets as land

and gold should not be permanently affected by the rate of inflation. A

change in the general rate of inflation should, in equilibrium, cause an

equal change in the rate of inflation for each asset price The experience of

the past decade has been very different from the predictions of this theory:

58
the prices of land, gold, and other such stores of value have increased by

substantially more than the general price level. The present paper presents

a simple theoretical model that explains the positive relation between the

rate of inflation and the relative price of such real assets. More specifically,

in an economy with an income tax, an increase in the expected rate of

inflation causes an immediate increase in the relative price of such 'store of

value' real assets. The behavior of real asset prices discussed in this paper

is thus a further example of the non-neutral response of capital markets to

inflation in an economy with income taxes.

* NOTE: While calculating the price of gold there are two inflation rates.

One is Gold internal inflation rate, which is change in its production from its

mines. Other is monetary inflation. The price of gold over the medium to

long term is determined by its inflation rate relative to that of the currency

you want to measure it with. With most fiat currency inflation rates, running

substantially higher than gold's inflation rate it is easy to see why the gold

price will continue to increase over time, and why it has consistently

increased over time. This is not about to change regardless of short-term

volatility.

59
Analysis:

inflation Inflation

Date Gold rate Date Gold rate

May-

May-05 6104.576 5.2 07 8863.392 5.27

Jun-

Jun-05 6185.849 4.14 07 8690.265 4.03

Jul-05 6173.774 3.84 Jul-07 8732.315 4.41

Aug-

Aug-05 6276.731 3.01 07 8829.425 3.94

Sep-

Sep-05 6574.167 3.75 07 9286.778 3.23

Oct-

Oct-05 6889.167 4.75 07 9671.96 3.07

Nov-

Nov-05 7174.826 4.54 07 10301.33 3.21

Dec-

Dec-05 7610.6 4.4 07 10247.9 3.45

60
 Jan-

Jan-06 7957.714 4.3 08 11264.54 4.11

Feb-

Feb-06 7998 4.34 08 11857.93 5.02

Mar-

Mar-06 8246.146 3.96 08 12609.42 7.41

Apr-

Apr-06 8958.106 3.59 08 11792.93 7.61

May-

May-06 9988.8 4.68 08 12142.66 8.75

Jun-

Jun-06 8896.447 4.84 08 12327.35 11.89

Jul-06 9513.714 4.67 Jul-08 13005.86 12.01

Aug-

Aug-06 9572.941 5.01 08 11791 12.1

Sep-

Sep-06 9029.255 5.16 08 12194.02 11.8

Oct-

Oct-06 8703.302 5.09 08 12715 10.72

61
 Nov-

Nov-06 9167.857 5.3 08 12108.59 8

Dec-

Dec-06 9152.87 5.58 08 12865.25 5.91

Jan-

Jan-07 9072.782 6.58 09 13475.67 4.39

Feb-

Feb-07 9494.511 6.1 09 14791.53 2.43

Mar-

Mar-07 9345.75 5.74 09 15254.53 0.26

Apr-

Apr-07 9311.894 5.66 09 14491.34 0.7

May-

09 14559.66 0.13

62
 Inflation Rate Gold Prices

10
12
14

0
2
4
6
8
10000
12000
14000
16000
18000

0
2000
4000
6000
8000
May-05
Jun-05

Jan-04
Jul-05
Aug-05
Sep-05
Oct-05
Nov-05
Dec-05
Jan-06

May-05
Feb-06
Mar-06
Apr-06
May-06
Jun-06
Jul-06
Aug-06

Oct-06
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07

Time Period
Feb-07

63
Mar-07

Feb-08
Apr-07
May-07
Jun-07
Jul-07
Time Period
Time Period

Aug-07
Sep-07
Gold Vs Inflation Rate

Oct-07

Jul-09
Nov-07

Trend Analysis Of inflation Rate

Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08

Nov-10
Jun-08
Jul-08
Aug-08
Sep-08

rate)
Oct-08
Nov-08
Dec-08
inflation rate
Jan-09

Linear (Trend
Feb-09
Trend Analysis of

Mar-09

Analysis of inflation
Apr-09
May-09
0 5 10 15
rate
Gold

Inflation Rate
inflation
Hypothesis Assumed :(H0)- The Repo rate doesn’t affect the gold

prices.

Alternate Hypothesis (H1)- The Repo rate affect the gold prices.

Regression Analysis:

Regression Statistics

Multiple R 0.893479

R Square 0.798305

Adjusted R

Square 0.779969

Standard Error 554.9848

Observations 49

ANOVA

Significanc

Df SS MS F eF

Regressio 7168366.40 7168366.40 1.2089321 0.27714387

n 1 8 8 5 8

64
 278686624. 5929502.65

Residual 48 8 6

285854991.

Total 49 2

Coefficie Standar Lower Upper

nts d Error t Stat P-value 99.0% 99.0%

Interce 9286.054 757.5061 12.25871 7252.487 11319.6

pt 853 594 861 0.00 444 223

X -

Variab 139.9434 127.2774 1.099514 0.277143 201.7399 481.626

le 1 076 544 508 878 966 812

Analytical Overview:

Significant correlation with r -0.893479

Change in INFLATION Rate accounts only 80% for the change in gold

prices.

Significant linear regression with p value- 0.277143878

65
Regression Equation- Y=139.943 X+9286.05

Interpretation:

The value of multiple R shows that (0.89) shows that there is significant

relation between gold prices and inflation rate. It verifies what ever our

studies are until now that is the gold is an inflation hedge. This analysis

also shows that change in inflation rate accounts 80% for the variation in

gold prices but this movement is in reverse direction. In addition, it should

be noted that increase in inflation rate accounts for increase in investment

in gold, as it is an inflation hedge.

Also from the t-value we can see that the hypothesis can be rejected. This

means that our assumption was wrong. (T-value is 1.099 which is less than

tabulated value 2.56). Also from the graph we can observe that in the initial

period the variation from the trend line is less in later period (from May 08

66
to May 09).Also in the later period the gap between gold prices and inflation

rate becomes larger which shows the inverse movement between them.

Now actually what happens is, when there is increase in inflation rate,

generally the RBI increases the CRR and Repo rate and the securities are

demanded more. Gold is one of them universally accepted within the

accepted within the banking industry. Therefore the demand increases as

well as prices also.

5. Bank Failures-

When dollars were fully convertible into gold, both were regarded as

money. However, most people preferred to carry around paper banknotes

rather than the somewhat heavier and less divisible gold coins. If people

feared their bank would fail, a bank run might have been the result. This is

what happened in the USA during the great depression of the 1930s,

imposing a national emergency and to outlaw the ownership of gold by US

citizens.

67
Source: RBI Site

This means that gold and bank failure are inversely related. Bank failure

will affect inversely the investment in gold but the relation is not visa-versa

absolutely.

6. Stock market-

The performance of gold bullion is often compared to stocks. They are

fundamentally different asset classes. Gold is regarded by some as a store

of value (without growth) whereas stocks are regarded as a return on value

(i.e. growth due to anticipated real price increase plus dividends). Stocks

68
and bonds perform best in a stable political climate with strong property

rights and little turmoil.

As the crude oil becomes cheap, the inflation rate goes down. (As on 6th

June 2012). We have discussed earlier that how inflation rate is on the

base of the gold prices. Similarly the lower inflation rate or the situation of

deflation makes the stock market down. It tends to lower return from the

stock market. At this time investment pattern moves towards the gold

market. Now the return from both these sources is of long terms.

Investment decision partly on, or solely on, technically analysis.

Analysis:

Date Gold Sensex Date Gold Sensex

May-05 6104.576 6,715.11 Jun-07 8690.265 14650.51

Jun-05 6185.849 7193.85 Jul-07 8732.315 15550.99

Aug-

Jul-05 6173.774 7635.42 07 8829.425 15318.6

Sep-

Aug-05 6276.731 7805.43 07 9286.778 17291.1

Sep-05 6574.167 8634.48 Oct-07 9671.96 19837.99

69
 Nov-

Oct-05 6889.167 7892.32 07 10301.33 19363.19

Dec-

Nov-05 7174.826 8788.81 07 10247.9 20286.99

Dec-05 7610.6 9397.93 Jan-08 11264.54 17648.71

Jan-06 7957.714 9919.89 Feb-08 11857.93 17578.72

Feb-06 7998 10370.24 Mar-08 12609.42 15644.44

Mar-06 8246.146 11279.96 Apr-08 11792.93 17287.31

May-

Apr-06 8958.106 12042.56 08 12142.66 16415.57

May-06 9988.8 10398.61 Jun-08 12327.35 13461.6

Jun-06 8896.447 10609.25 Jul-08 13005.86 14355.75

Aug-

Jul-06 9513.714 10743.88 08 11791 14564.53

Sep-

Aug-06 9572.941 11699.05 08 12194.02 12860.43

Sep-06 9029.255 12454.42 Oct-08 12715 9788.06

Nov-

Oct-06 8703.302 12961.9 08 12108.59 9092.72

70
 Dec-

Nov-06 9167.857 13696.31 08 12865.25 9647.31

Dec-06 9152.87 13786.91 Jan-09 13475.67 9424.24

Jan-07 9072.782 14092.92 Feb-09 14791.53 8891.61

Feb-07 9494.511 12938.09 Mar-09 15254.53 9708.5

Mar-07 9345.75 13072.1 Apr-09 14491.34 11403.25

May-

Apr-07 9311.894 13872.37 09 14559.66 14625.25

May-07 8863.392 14544.46

71
 Sensex Value gold prices

10000
12000
14000
16000
18000

0
2000
4000
6000
8000
May-05
Jun-05

10,000.00
15,000.00
20,000.00
25,000.00

5,000.00

0.00
Jul-05
Aug-05
Sep-05
Oct-05
Nov-05
Dec-05
Jan-06
Feb-06
Mar-06
Apr-06
May-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07

72
Apr-07
May-07
Jun-07
Jul-07
Time Period
Time Period

Aug-07
Sep-07
Oct-07
Gold Vs Sensex

Nov-07
Dec-07

Time period
Jan-08
Feb-08
Mar-08
Apr-08
May-08

Trend Analysis of Sensex Values

Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Gold
sensex

0.00
5,000.00
10,000.00
15,000.00
20,000.00
25,000.00

Sensex value

Aug-04 Feb-05 Sep-05 Mar-06 Oct-06 Apr-07 Nov-07 Jun-08 Dec-08 Jul-09 Jan-10
Hypothesis Assumed (H0): Sensex values and Gold prices are not

sufficiently co-related.

Alternative Hypothesis (H1): Sensex value and Gold Prices are

sufficiently co-related.

Regression Analysis:

Regression Statistics

Multiple R 0.671901

R Square 0.451451

Adjusted R

Square 0.396596

Standard

Error 421.0839

Observations 49

73
ANOVA

Significanc

Df SS MS F eF

Regressio 8.22991834

n 1 1459260.49 1459260.49 4 0.01670353

1773116.60 177311.660

Residual 48 8 8

3232377.09

Total 49 9

Coefficie Standar Lower Upper

nts d Error t Stat P-value 99.0% 99.0%

Interc 7127.154 774.2248 9.205536 4673.424 9580.884

ept 538 155 163 0.0000 988 087

X -

Variab 0.137944 0.048084 2.868783 0.01670 0.014448 0.290337

le 1 363 621 426 353 911 637

74
Analytical Overview:

Significant correlation with r -0.671901

Change in INFLATION Rate accounts 46% for the change in gold prices.

Significant linear regression with p value- 0.0167

Regression Equation- Y=0.1379 X-7127.154538

Interpretation:

The relation between the gold and stock market can be clearly interpretated

from the analytical calculation from the data. The t-value, p-value, multiple

R & R square values clearly shows the picture. Here the t- value is 2.86

which is greater than tabulated value 2.56. This means that our hypothesis

is wrong. There is significant correlation between gold prices and Sensex

value. Also the Multiple R is 67% which shows the significancy of relation

between the two factors. The p-value is also very less.

From the graph-2 we can observe the trend in the fluctuation in the Sensex

value. We can observe that now the market is recovering. The graph-1

shows the correlation. In the period after apr-08 the correlation is less

which is due to the crisis effect.

75
7. The Gold Anti Trust Committee:

The Gold Anti-Trust Action Committee was organized in January 1999 as a

Delaware corporation to advocate and undertake litigation against illegal

collusion to control the price and supply of certain financial securities,

particularly securities involving gold. The committee arose from essays by

Bill Murphy, a financial commentator, and by Chris Powell, a newspaper

editor in Connecticut, published at Murphy's Internet site. Murphy's essays

reported evidence of collusion among financial institutions to control the

price of gold. Powell, whose newspaper had been involved in antitrust

litigation, replied with an essay proposing that gold interests should act on

Murphy's essays by bringing suit against the financial institutions involved

in the collusion against gold. The response to these essays from gold

interests throughout the world was so favorable that the committee was

formed. Murphy is chairman and Powell is secretary/treasurer. GATA seeks

to disclose and publicize the huge speculative short positions in gold taken

by financial institutions and bullion banks. GATA believes that 10,000 tons

of gold or more have been sold short by these speculators, even as yearly

mine supply of gold is only about 2,500 tons. When we are able to show

how the gap between gold demand and mine supply is being filled largely

76
by dishoarding of central bank gold reserves, investors may buy gold in

quantity, knowing the supply gap is too large to close without causing a

substantial rise in the price of gold. Then the gold price suppression

scheme will be over.

8. Low or negative real interest rates:

If the return on bonds, equities and real estate is not adequately

compensating for risk and inflation then the demand for gold and other

alternative investments such as commodities increases. An example of this

is the period of STAGFLATION that occurred during the 1970s and which

led to an economic bubble forming in precious metals.

*STAGFLATION is a situation when inflation and economic

stagnation occurs simultaneously.

* An economic bubble (sometimes referred to as a speculative bubble,

a market bubble, price bubble, a financial bubble, or a speculative

mania) is trade in products or assets with inflated values.

77
9. War, invasion, looting, crisis:

In times of national crisis, people fear that their assets may be seized and

that the currency may become worthless. They see gold as a solid asset,

which will always buy food or transportation. Thus in times of great

uncertainty, particularly when war is feared, the demand for gold rises. So

price also rises.

78
10. Demand & Supply:

Demand and Supply factor is very important for the price analysis of Gold.

The demand – supply dynamics play an important role in determining the

price of Gold. For a long time Gold prices have been suppressed as a

result of concerted selling by Central Banks of various countries. However

this trend has reversed, with Central Banks, especially those of Russia and

China becoming net importers of Gold. The demand for Gold is primarily

driven by three factors:

Ø Jewellery

Ø Industrial Uses

Ø Investment

As a result of the huge spike in Gold prices, Jewellery demand from

countries like India and the Middle East fell by 22 % in tonnage terms from

a year earlier. In Asia and the Middle East, which account for around two

thirds of the Jewellery demand, consumers and the retail trade are very

sensitive to price volatility. However we believe that consumers within

79
these markets will continue to purchase Gold Jewellery if they are offered

the right products at the right price.

Jewellery Demand Chart

1000
900
Demand in tonnes

800
700
600
500
400
300
200
100
0
Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q4- Q1-
2004 2004 2004 2004 2005 2005 2005 2005 2006
Time period

Demand (tonnes)

INDUSTRIAL:

The global economy enabled electronics demand to rise strongly, causing

overall industrial demand to increase by 5 % compared to a year earlier.

This form of gold demand is not price sensitive since manufacturers of

electronic goods which need electronic components, cannot change

specifications overnight. The strong growth was due to a recovery in the

Japanese market for Gold bonding wire. There was also a slight growth in

the dental use of gold.

80
 Industrial Demand Chart

115
Demand in tonnes

110
105
100
95 z
90
Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q4- Q1-
2004 2004 2004 2004 2005 2005 2005 2005 2006
Time period

Demand (tonnes)

INVESTMENT:

The main propellant for the high Gold prices was the investment demand.

The increase in investment demand was due to the growing number of

investors who are seeking to use Gold to hedge against different types of

risk. In countries like the US and Switzerland, the rising price spurred

interest from investors driving overall investment demand up. Moreover a

recent development has been that in India where traditionally Gold has

been consumed as Jewellery, increasing promotion of Gold bars and coins

by several banks resulted in Gold being purchased for investment

purposes. However the main driver of investment demand was the

investment in Gold Exchange Traded Funds whose total off take for the first

quarter was around 109 tonnes.

81
60

Investment Demand Chart

250
Demand in tonnes

200
150
100
50 z
0
Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q4- Q1-
2004 2004 2004 2004 2005 2005 2005 2005 2006
Time period

Demand (tonnes)

*SUPPLY SIDE:

While investor activity was the main driver behind the rising Gold price in

the first quarter of 2006, a contraction in supply also helped. Mine

production plays a vital role in determining the price of Gold as it is the only

way by which new stocks can be added to the existing above the ground

stocks. A sharp decline in mining production in the first quarter of 2006

contributed to the high prices of gold during that period. Although Gold

prices are attractive now, it will take at least 3-4 years to get a new mine

into commercial production stage. So any near term increase of supplies

can be ruled out. But, the main factor constraining supply in the first quarter

of 2006 was a sharp reduction in net central bank selling which, at 116

tonnes, was 57 % lower than the comparative period in the year 2005. This

82
sharp decline in supply caused by the fall in central bank sales was partly

Offset by a very substantial rise in scrap supply which in the first quarter of

2006 was higher by 51 % compared to the first quarter of 2005. Huge sales

by Central Banks were the primary factor in suppressing Gold prices in the

nineties. Reduction in these sales due to the Central Banks Gold Sales

Agreement will play an important role in supporting higher Gold prices.

The demand and supply factors as outlined previously do play a role in

determining Gold prices; however they are not the most important ones. As

we have outlined previously, since Gold acts as a reserve currency to the

US dollar, the factors which work negatively for the US Dollar work

positively for Gold and vice versa. These factors are outlined here in the

following sections under various categories like GDP, Trade Balance, and

the like.

* So we can say that the gold prices are directly proportional to the

demand and inversely proportional to the supply.

83
 Current Scenario Analysis:

The Current Scenario is analyzed in the terms of:

 Crude oil Prices

 US Dollar Value

 Repo Rate

 Inflation Rate

 Real interest rates

 Demand And Supply

 Stock market

 GDP

84
 High Inflation Period To Deflation Period-

There was the period of high inflation in the year 08.The inflation rate starts

from the rare 4.11 & lasts to 0.13 in the may 09. By observation the trend

analysis Graph we can expect that now the inflation rate is rising from the

deflationary period. On 6th June 2012 the inflation rate 0.48and the current

inflation rate is -1.61 means deflation.

This deflation is due to the downward trend in the crude oil prices as it can

be observed from the graph of the crude oil. The movement of oil prices in

the world markets has brought about the setting in of some important

changes. We have witnessed that the price of oil has been slowly coming

down but not before the governments of the world interfered in some way.

For starters, they realized that there were two ways to deal with the

problem. Firstly to use the OPEC meetings as a means to persuade oil

producers to produce more oil in an effort to match supply with demand for

oil. The second way was to strictly monitor the oil markets to make sure

that the speculation over the price of oil does not set in hence leading to

inconsistent buying and selling frenzies These two primary steps have

brought down the level of oil to where it is today. For India the cooling of oil

prices has helped the rate of inflation to slightly decrease. Today’s inflation

85
 figures show that the figures have fallen for the third week in a row. It is

however premature to say that the grip of inflation has melted away.

 GDP OF INDIA:

India GDP and Standard of Living are closely related as GDP features

among the significant factors in the assessment of the standard of living.

Standard of living comprises quality as well as amount of commodities

offered for consumption by the citizens and the distribution system.

The substantial growth in various sectors like IT, Real Estate, ITES has led

to the improvement of the standard of living at a constant rate. However,

the statistical figures still delineate that approximately 27.5 % of the Indian

population lives below the poverty line. The most significant indicator

required to measure the standard of living is in realty per capita purchasing

power parity-adjusted gross domestic product.

A comparative analysis of the standard of living of India with other

countries will aid in the assessment of the position of India in the standard

of living chart. The per capita- adjusted gross domestic product of China in

the year 2003 was $4,900 and that of the majority of western European

countries is $26,000 and that of the most developed country like US is

86
$33,000. The per capita- adjusted gross domestic product of India has

been calculated to be US $ 31, 00

Measurement of India GDP and Standard of Living:

GDP makes an assessment of India's national output by dividing the

current GDP of India with the total population of the country. In the

examination of overall production, GDP takes into account both the public

as well as the private consumption accompanied with the manufacture of

capital goods that consequently aid in the further production of

commodities.

Current Statistics:

Industry Q1 Q2 Q3 09 Growth rate in

2012-2013 %

(Estimated )

Agriculture, 3.0 2.7 -2.2 2.6%

forestry &

fishing

Manufacturing 5.6 5 -0.2 4.1%

87
 Construction 11.4 9.7 6.7 6.5%

Financing, 9.3 9.2 9.5 8.6%

insurance, real

estate &

business

Services

Mining & 4.8 3.9 5.3 4.7%

quarrying

Trade, hotels, 11.2 10.7 6.8 10.3%

transport and

communication

Community, 8.5 7.7 17.3 9.3%

social &

personal

services

Electricity, gas 2.6 3.6 3.3 4.3%

& water supply

Source: RBI- Hand Book of Statistics

88
Repo Rate and Other Rates-

The Indian economy ushered in 2011 amidst excess liquidity related

problems in the system. Growth in money supply saw 21.2 % increase in

the last week of April 2011 on y-o-y basis, it touched 22.5% in May end and

slowed to 20.7% by the end of June 2011. During Jan-May08, With inflation

and money supply growing far above RBI's target, the RBI raised the CRR

by as much as 75 basis points effective in 3 phases during April and May to

control excess liquidity and to rein in inflationary expectations. Between

June and Aug 08, the RBI increased repo rate by 125 basis points and

CRR by 75 basis points to 9.0% each. The increase in capital outflows

especially from the equity markets had put significant downward pressure

on the rupee value. This in turn led to RBI intervention in the forex market

through dollar sales to support the falling value of rupee and thereby

adding to the tight liquidity conditions.

Global financial woes intensified significantly in Sep 08, with the collapse of

Lehman Bros and bankruptcy of some other big financial institutions. The

financial distress caused thereby was characterized by severe credit freeze

and crisis of confidence worldwide. The substantial FII outflows from

domestic stock markets coupled with tight monetary policy followed by the

RBI till Aug 08 led to significant liquidity crunch in the money market.

89
Meanwhile, FII outflows from equity, increased dollar demand by oil

importers (due to surging oil prices) and strengthening of dollar against

other major currencies exerted significant downward pressure on rupee

value. In order to arrest further fall in rupee value, the RBI intervened in the

forex market by way of dollar sales, which in turn resulted into absorption of

liquidity from the system and added to the liquidity pressures.

*Also the real interest rates are decling or not giving the proper return.

*Current Repo Rate-4.75%

*Current CRR-5%

*Current SLR-24%

Trends in the Exchange Rates:

90
The rupee moved in the range of Rs.39.89-50.53 per US dollar during the

financial year 2012-2013 so far. The rupee showed a depreciating trend

during the second quarter of 2012-2013, which started in the beginning of

current financial year. The rupee remained around the level of Rs.43 per

US dollar during third week of May 2011 to second week of August 2011,

depreciated thereafter sharply mainly on the back of widening trade deficit,

capital outflows and strengthening of US dollar.

From January to May 22nd Rupee depreciated by 7% as against the US

dollar. The Indian rupee depreciated by about 20 per cent against the US

dollar in 2011 due to a combination of factors. As the credit crisis deepened

in the West, foreign money started leaving Indian shores, which resulted in

the rupee falling. Money from all across the world flowing into US Treasury

bonds in search of safety resulted in the US dollar appreciating. As a result

currencies across the world, including the Indian rupee, depreciated.

The rupee is expected to appreciate in the next fiscal and to be around

46.5/US$ by the end of FY10. On an average, rupee is expected to be

around 45.90/US$ during FY09 and 47.50/US$ during FY10. The

appreciation in rupee in next fiscal (towards end) would be on account of

an expected fall in value of US dollar and resumption in the FII inflows as

the global economy begins to stabilize the latter part of FY10.

91
*Current exchange rate of US $- Rs.48.53

Stock market:

The stock market has badly crashed in the year 08. But it is recovering

now. It is also below the trend line. So we can say that this factor is

supporter of gold investment in the current scenario.

*Current Sensex Value-14422.73

Supply and demand in the current scenario-

Gold market is undergoing radical change with investments in Europe and

US taking a lead over the traditional market – Jewelry in India. While Indian

Jewelry is still the world’s biggest consumer, the market seems more

diverse now. Gold ETF- GLD has become the biggest market mover and

there has been heavy demand for coins and bars. If this fundamental

change in consumer/investor choices continues, Gold could see a

significant upward movement in price in the short to medium term, and

even a $1200/ounce is likely. It remains to be seen how this change in

behavior would continue after the end of this crisis (in 3-5 years). If it is a

permanent change, it is good for gold industry as it gives a far

92
wider/diverse base and removes the quirkiness associated with Indian

marriage seasons and domestic economy.

Indian consumption is the only bright aspect in the Jewelry scene, with the

Jewelry consumption of rest of the world has gone to the toilet. This is most

likely due to the fact that world recession has not come to India so far.

However, Jewelry consumption could significantly tank once the reality

sinks in and Indian market goes faces Economic straight winds.

India as-expected leads the space. It consumed nearly 21.3% of world gold

in Q4 and it has regained back its lead from the US. China, Europe and US

for the next 3 big markets. Indian Jewelry shows a significant upswing while

Jewelry consumption in many other countries are facing deep downturn –

most notably in Turkey, US and UK. This is partly due to the fact that world

recession has not come to India in a big way so far. But this could change

and Jewelry could be deeply hit.

Also we can observe that the demand has almost higher than the supply.

The trends also show that demand is also on the higher side in the near

future.

FINDINGS & RECOMMENDATIONS

93
 Findings:

a) The dollar is weak and getting weaker due to national economic policies

which don’t appear to have an end.

b) Gold price appreciation makes up for lost interest, specially in a bull

market.

c) Central Banks in several countries have stated their intent to increase their

gold holdings instead of selling.

d) All gold funds are in a long term up trend with bullion, most recently setting

new all-time highs.

e) The trend of commodity prices to increase is relative to gold price

increases.

f) Worldwide Gold production is not matching consumption. The price will go

up with demand.

94
g) Most Gold consumption is done in India &also its demand is increasing with

their increase in national wealth.

h) Several gold funds reached all-time highs in 2011 and are still trending

upward.

i) U.S government economic policies over the past decade have

systematically projected the U.S economy down a road with uncontrollable

federal spending and uncontrollably increasing trade deficits. Both will

cause the dollar to lose in international value and will increase the price of

alternative investments, specially gold.

j) With the recent devaluation of many international currencies, the U.S dollar

was the international safe haven of last resort. We can observe the signs of

this ending due to many financial factors, the most important one being a

falling dollar.

95
k) There are over one trillion dollars of U.S debt owned by foreigners which

could be repatriated under certain conditions. This could cause a major

decline in the value of the dollar and a soaring gold price.

l) Gold is still low, but climbing.

Limitations of the study:

Every study suffers from some limitations which are inevitable:

 The time period taken for the analysis part is only 5 years. It would have

better if taken more.

 The analysis is based on the monthly data. The graph reveals more

accurate picture if the data is taken monthly or daily.

 The project is maximum based on the secondary data.

 We can clearly review the effect of global crisis on the analytical part.

96
 Recommendations:

Now on the basis of above findings we can conclude and recommend that

this is the right time to invest in gold. Besides Bank FDs, Indian investors

have a revealed preference towards Gold as a viable investment avenue.

Gold remains a favorable investment avenue in India. The Survey depicted

that 97% of the investors invested in Gold in Q4, 2011 compared to 42% in

Q3, 2011. The reason seems obvious. Gold gained an impressive 23.13%

between Jan 1, 08 and Jan 9, 09. Moreover, it gained 91.1% between Jan

1, 07 and Jan 9, 09.. The BSE Sensex and S&P Nifty fell by ‐32.53% and

‐28.31 respectively.

Hence, the reasons for Gold Fund Investing are:

 Enormous Volatility in the Equity Markets.

 Global Recessionary Syndrome.

 Low Inflationary pressures

 Depreciation of US dollar as price of gold is inversely proportional to the

value of the US dollar.

 Countries keep the major chunk of their foreign exchange reserves in US

dollar or Gold. With the depreciation of dollar, countries will be compelled to

keep their reserves in Gold so as to maintain the reserves.

97
 The sharp fall in equities prompted the investors to park their money in

Gold Funds. Gold reserves with Gold Trust, the world’s largest Gold

Exchange Traded Fund (ETF) touched 780.23 metric tons on Dec, 29,

2011 up from 627.88 metric tons at the beginning of the year.

 Gold miners are the best performers in the 162 member Bloomberg World

Mining Index

7The sub‐prime crisis leads to recessionary pressures across the globe. In

order to tide over the crisis, governments are resorting to excessive

borrowing. This created an adverse impact on the currency.

 Investors flock to gold as a hedge against currency depreciation

 Gold is a safe investment option in a situation of deflation. Merrill expects

that the global inflation will near to zero. In a situation of low inflation, gold

can act as a store of value as bank deposits will generate low return. With

reducing inflationary pressure, lending rate goes down. However, banks’

offset the low interest income by reducing deposit rate as they have to

maintain Net Interest Margin. So in my opinion this it is the right time to

invest in gold.

98
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