Gold Vs Nifty & Crude


By

S. Shankari
B.E, MBA, PGDHRM, Mphil
Faculty in Finance
R.L. Institute of Management studies
TVR Nagar, Aruppukottai Road, Madurai-625022
 


1. Introduction

The gold price and oil price runs because of its intrinsic value. All are important in this world. People are wearing gold and they have to travel to exhibit it and they need fuel for it. All are found below ground levels and both are to be processed. Crude to remain in a priority position till another source of energy not discovered.

Basically, Gold is an inflation Hedge. If inflation of any country increases, investors buy gold to balance their portfolio and gold price will move up. So,
d uring inflation the gold price-rises-and-the-stock-market-falls.

The crude price directly affects the oil import bill of any country. Increase in Imports Bill will increase the Trade deficit ( Export - Imports) of countries. Higher Trade deficit would hit the value of currency of the country. This will affect the money circulation in the economy there by leading inflation. So, If Crude price rises, Gold will also move up.

So, there is some indirect relationship between these three things (i.e. Gold, Crude and Nifty). So, to assess the relationship between these three things, the following study is carried out.

2. RESEARCH METHODOLOGY:

For comparing the prices of gold, crude and nifty, the researcher has taken the price data for 5 years (from Apr'2005-Apr'2010). The daily prices of these three things are considered to calculate the monthly average price. For this, historical price of gold has been collected through ncdex.com, the price of crude has been collected form mcxindia.com and nifty values are collected through nseindia.com. By using these data, the researcher tries to find out the following things:

1. Monthly average price movement and returns of Crude, Nifty and crude.

2. By using the monthly average prices, the researcher calculated the monthly average returns of gold, crude and nifty.

3. The researcher has used correlation method and cross price elasticity of demand concepts to assess the relationship between the gold & nifty and gold & crude.

Chart No:1.Movement of monthly average gold price ,crude oil price  and  value of nifty(From April-05 to Apr-10)

Source: secondary data

Chart No..2. Average monthly returns from Gold, Crude oil and Nifty
from Apr'05-Apr'10

Source: secondary data

In the year of 2009, Nifty has given good return followed by gold and crude.

2.1. PEARSON PRODUCT-MOMENT CORRELATION COEFFICIENT

In statistics, the Pearson product-moment correlation coefficient (sometimes referred to as the PMCC, and typically denoted by r) is a measure of the correlation (linear dependence) between two variables X and Y , giving a value between +1 and 1 inclusive. It is widely used in the sciences as a measure of the strength of linear dependence between two variables

Pearson's correlation coefficient between two variables is defined as the covariance of the two variables divided by the product of their standard deviations.

Correlation Co-efficient Formula :

Correlation(r) = NXY - (X)(Y) / Sqrt([NX2 - (X)2][NY2 - (Y)2])

Interpretation from Pearson Correlation Coefficient

* The correlation coefficient ranges from 1 to 1.

* A value of 0 implies that there is no linear correlation between the variables

* +1 indicates a perfect positive linear relationship: as one variable increases in its values, the other variable also increases in its values via an exact linear rule.

By applying the figures of Average monthly return from gold, crude and nifty  in the correlation formula , we will get the result as  follows:  

Table:1. Correlation of gold with crude and nifty:

Correlation of gold with

Correlation coefficient

Remarks

Crude (From 2005-2010)

0.24

 positive relationship

Crude (From 2007-2010)

0.18

 positive relationship

Nifty (From 2005-2010)

0.06

 positive relationship

Nifty((From 2007-2010)

-0.02

 negative relationship


2.2. CROSS ELASTICITY OF DEMAND

In economics, the cross elasticity of demand or cross-price elasticity of demand measures the responsiveness of the demand for a good to a change in the price of another good.

It is measured as the percentage change in demand for the first good that occurs in response to a percentage change in price of the second good. For example, if, in response to a 10% increase in the price of fuel, the demand of new cars that are fuel inefficient decreased by 20%, the cross elasticity of demand would be 20%/10% = 2.

The formula used to calculate the coefficient cross elasticity of demand is


Table No:2. Comparision of demand for gold and crude oil price(from 2004-2009)

DETAILS

Value (in ercentage)

Avg demand of gold  from 2004-2006(in metric tones)

3548

Avg demand of gold from 2007-2009(in metric tones)

3581

Price of crude from 2004-2006(in Rs.)

2734

Price of crude form 2007-2009(in Rs.)

3341


Change in demand (from 2004-06 to 2007-09) =0.9301%

Change in price of crude (from 2004-06 to 2007-09) = 22.2019%

CPeOD=0.04. Here, CPeOD is greater than Zero.

According to this Gold and crude are substitutes

Table:2. Comparision of demand for gold and value of nifty (from 2004-2009)

DETAILS

Value (in percentage)

Avg demand of gold  from 2004-2006(in metric tonnes)

3548

Avg demand of gold from 2007-2009(in metric tonnes)

3581

Value of nifty from 2004-2006(in points)

2645

Value of nifty from 2007-2009(in points)

4335


Change in demand (from 2004-06 to 2007-09) =0.9301%

Change in value of nifty (from 2004-06 to 2007-09) =63.89%CPeOD =0.01

Here also, CPeOD is greater than zero.So, Gold and nifty are substitutes.
 

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Source: E-mail December 11, 2010

          

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