Asia Pacific Journal of Research Vol: I Issue XV, July 2014 ISSN: , E-ISSN

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1 Asia Pacific Journal of Research Vol: I Issue XV, July 2014 ISSN: , E-ISSN IMPACT OF CRUDE OIL AND US DOLLAR ON GOLD PRICES IN INDIA Dr. Poonam Bassi, Assistant Professor, Baddi University of Emerging Sciences & Technology, NH-21 A, Baddi, Distt. Solan, Himachal Pradesh India, Ms. Bhavna Sharma, Assistant Professor, Baddi University of Emerging Sciences & Technology, NH-21 A, Baddi, Distt. Solan, Himachal Pradesh India, ABSTRACT The price of gold is well thought-out as a major precursor of global economy. The investors always look for the mixture of outlay avenues which boost their risk-adjusted profits and add diversification. Ever since ages, gold is preferred as the one of the major investment alternative especially by the Indian investors. The dynamic and multifaceted relationship among economic variables has fascinated the researchers, policy makers and business people alike. This study is an attempt to test the dynamic association among gold price, exchange rate of USD dollar and Crude oil price. All these variables have witnessed significant changes over time and hence, it is absolutely necessary to validate the relationship sporadically. This paper is mainly focused on the factors like exchange rate of US dollar, Crude oil prices. The relationship between the factor and the gold prices is emphasized in this paper with the help of statistical tools i.e. - T-Test and through Trend Analysis. This study takes data from 2000 to There exists an inverse relationship between the exchange rate of USD dollar and gold prices. The crude oil prices have a positive impact on the gold prices. Key Words--: Economy Variables, Relationship, exchange rate, demand. Introduction Gold is considered to be a hedge against inflation, recession, and other times of uncertainties, especially due to its high demand and finite supply. This precious metal was, for a long time in history, used as currency, and is still a safe haven for investors. Consequently, most central banks around the world invest more in gold to preserve their assets during volatile economic conditions. 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 Page 60

2 properties. There has been drastic increase in the prices of gold since 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. The price of Gold is determined by several factors. It is an important commodity in certain products such as jewellery. However it is also seen as an important way to invest wealth especially in times of economic uncertainty. The world consumption of new gold produced is about 50% in jewellery, 40% in investments, and 10% in industry (excellent as conductor and resists corrosion) Factors Affecting Gold Price Value of US dollar The foremost factor that governs the price of gold is the value of US Dollar. A stronger US dollar will keep the price of gold controlled and low. A weak dollar will set the price of gold spiraling to a very high price. US economy plays a major role in shaping the macroeconomics of the world. When the dollar is strong, people invest, buy and trade in dollars. However, in recent times, the US economy has suffered a lot. Dollar has not remained as powerful and promising as ever; this is the reason why people and nations start investing and hoarding in bullion. The high gold reserves strengthen the national economies and act as a hedge against inflation. Production of gold Due to the rising cost of production in gold mining, strikes by gold-miners, worsening political situation, the sharp increase in the oil prices after the Iraq war, and terrorist attacks, a decline in the gold-mining production has been recorded for the past 5 years. The world population is constantly rising, and so is the demand of investment in bullion. Man has always believed in investing in bullion since ages. So, the prices of gold are also affected by the natural desire of man to hoard gold Demand for jewellery China and India are the biggest buyers of bullion for their jewellery market. In the year 2004, Chinese citizens were granted the ownership of gold for the first time in history. This triggered a very high demand of bullion, which subsequently affected the price of bullion worldwide. In 2009, a record 32% decrease in the demand for gold-jewellery was recorded, due to the global economic crisis, which resulted in a slight decline in the gold-price. Central Banks Reserves Central banks keep gold reserves as a hedge against inflation. Other monetary policies of the central banks also affect the price of gold. Low interest rates discourage people to invest in paper money; they turn towards the golden metal in the hope of better returns. If the central banks give high interest rates, the chances are that the gold price will fall. Literature Review: Adrangi et al. (2003) conclude that gold has a positive relationship with expected inflation; there exists no relationship with unexpected inflation. The study by Janabi et al. (2010) explores whether the Gulf Cooperation Council (GCC) equity markets are informationally efficient with regard to oil and gold price Shocks during the period using daily dollar-based stock market indexes Dataset. The study also examines the impact of the impact of oil and gold prices o the financial performance of the six distinctive GCC stock markets. The study finds that GCC equity markets are informationally efficient with regard to gold and oil price indexes. The study by Zang et al. (2010) analyzes the co integration relationship and causality between gold and crude oil prices. The study finds that there are consistent trends between the crude oil price and Page 61

3 gold price with significant positive correlation during the sampling period. The study further suggests that long term equilibrium between the two markets and the crude oil price change linearly Granger causes the volatility of gold price. With respect to the common effective price between the two markets, the contribution of the crude oil price seems larger than that of gold price. Wang et al (2010) used daily data and time series method to investigate the impacts of fluctuations and long and short-term relationships in crude oil price, gold price, and exchange rates of the US dollar vs. various currencies on the stock price indices. Mahmood Yahyazadehfar and Ahmad Babaie (2012) have made a study to examine the impact of macroeconomic variables such as interest rate, house price and gold price on stock price in capital market of Iran based on monthly data from March 2001 to April 2011 using VAR and Johansen- Juselius model. From the study it is clear that most of fluctuation in stock price can be recognized to itself, nevertheless among the selected variables, the house price has main role on stock price fluctuation. Subarna K. Samanta and Ali H. M. Zadeh (2012) examined the co-movements of selected macrovariables (gold price, stock price, real exchange rate and the crude oil price) based on 21 years data using econometric models for the periods from January 1989 to September The study exposes that there is a co integration relationship between the variables. Need of the Study: There are a number of distinctive qualities that separate gold from the rest of the commodities, such as the U.S. dollar is weakening, Inflation fears, Emergence of China and India, Supply constraints, Geopolitical instability. But gold is viewed as a safe haven during times of political or economic calamity. Data Source The study is based absolutely on secondary data obtained from various data sources including crude oil indices (WCI) and US dollar exchange rates. For causal research to establish the quantitative relationship between prices of gold and other factors (daily prices of gold and other factors) were collected from the various secondary sources like newspapers, internet, magazines, books, journals were referred to understand the relationship between price movements of gold and other factors. Objectives of the study: To analyze the different factors which affect the price of gold. To find out the trend analysis of Gold prices, exchange rate of USD dollar & crude oil prices. To study and analyze the relation between exchange rate of USD dollar and gold prices. To study and analyze the relation between Prices of crude oil and the gold prices. Research Methodology: 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. Hypotheses: 1. Hypothesis Assumed (H0): Gold Prices do not depend upon Dollar exchange rate. 2. Hypothesis Assumed (H0): Gold prices do not depend on crude oil prices. Page 62

4 Tools and techniques: 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 The analysis of all these above mentioned factors is as follows: Table-I Trend Analysis for Prices Change in US Dollar, crude oil and Gold Price Year End Gold Price Per 10 Gram Crude Oil Price(Dol lars per Barrel) US Dollar Exchange Rate %age change in Gold Price Per 10 Gram %age change in crude oil price per Barrel %age change in US Dollar Exchange Rate Page 63

5 % a g e C h a n g e %age Change in Variables Years %age change in Gold Price Per 10 Gram %age change in crude oil price per Barrel %age change in USD Dollar Exchange Rate Fig- I-: It shows the trend lines of Gold, Crude Oil & US Dollar Exchange Rate. Comparison of every year prices has been done with previous year. There is % increase in gold price in 2013 in comparison to Whereas, % increase in crude Oil price in 2013 in comparison to US Dollar price reveals 40% increase in comparison to 2000.Highest increase in Gold price was 42.7% in 2011 in comparison to previous year. Highest increase in Crude oil price was 81.2% in 2009 in comparison to previous year. US Dollar price reveals highest increase in 2013 (18.1%) in comparison to previous year. 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. Now there 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. There is an intrinsic co-relation between gold prices and the US dollar. When the demand for the US dollar falls, banks as well as investors around the world invest more in gold. This measure helps them protect their money and hedge against uncertainties. The demand, and consequently the value of gold hence increases. Similarly, when the US dollar appreciates, an increasing number of investors shift their investments from gold to the US dollar. This fall in demand causes the value of gold to depreciate. This behavior of investors creates an inverse relationship between gold and the US dollar. However, it would not be appropriate to conclude that the price of gold and the US dollar always move in opposite directions, mainly because other external factors also impact the prices of these two instruments. Some people, for instance, might invest heavily in gold during a recession, whereas others might consider the US dollar to be a safer investment. In such a situation, the value of both these options might go up. Table II reveals both negative & positive relations between USD Dollar price & Gold price in short run. In 2001 both had negative correlation where as in 2002 it had positive correlation. It shows that in short run USD Dollar price & Gold price had both had negative & positive correlation. Statistical analysis reveals 0.37 value of c correlation between USD Dollar price & Gold price from It means in long run both have Page 64

6 positive relationship. Calculated value is more than table value which shows that our first hypothesis is wrong & Gold price depend on USD Dollar price. Table II: Relationship Between US Dollar Exchange Rate and Gold Price Year End Gold Price Per 10 Gram US Dollar Exchange Rate Correlation in short run Paired Samples Statistics Mean N Std. Deviation Pair 1 Paired Samples Test Gold Price & Dollar Pair 1 Price Gold Price Dollar Price Paired Samples Correlations N Correlation Sig. Gold Price & Dollar Pair 1 Price Paired Differences Lower Upper t df CRUDE OIL: The crude oil is one of the factors for inflation. As the prices of crude oil increases, economy always falls into a recession there is upward pressure on inflation. In order to hedge against the inflation people invest in gold. So it can say that there is a relationship between gold and crude oil prices. It will be clearer from the following discussion. Gold has almost always been the most-highly-sought-after universal store of wealth and the gold is the king of all the currencies. The demand for crude oil is in elastic. Now paper currencies lose their purchasing power with time but this doesn t happen with the gold. So during inflationary period when other currencies lose their value more gold can be purchased with gold due to its purchasing power stability. So during high crude oil prices, high inflation, and declining equity market gold can be stored Page 65

7 to hedge the inflation. The main idea behind the gold-oil relation is the one which suggests that prices of crude oil partly account for inflation. Increases in the price of oil result in increased prices of gasoline which is derived from oil. If gasoline is more expensive, than it s more costly to transport goods and their prices go up. The final result is an increased price level in other words, inflation. The second part of the causal link is the fact that precious metals tend to appreciate with inflation rising (in the current fiat monetary environment). So, an increase in the price of crude oil can, eventually, translate into higher precious metals prices. Table III : Relationship between Crude Oil and Gold Price Paired Samples Statistics Mean N Std. Deviation Pair 1 Gold price Crude oil Paired Samples Correlations N Correlation Sig. Pair1 Gold Price & Crude Oil Price Paired Samples Test Paired Differences t df Lower Upper Pair 1 Gold Price Crude Oil Price Table III reveals value of correlation between Crude oil & Gold price.it means that there is a strong positive correlation between Crude oil & Gold price. Calculated value is more than table value which shows that our second hypothesis is wrong & Gold price depend on Crude Oil Price. Conclusions:- This paper aims at exploring the association among the crude oil price, gold price and US dollar price. There is a native correlation between gold prices and the US dollar price. In short run, Gold price and Dollar value share an inverse relationship whereas there is positive correlation between both in long run. When the demand for the US dollar falls, banks as well as investors around the world invest more in gold in short run but in long run other external factors also impact the prices of these two instruments. Gold prices and Crude oil price share a positive correlation which can be unstated from the analysis. Gold price persists to increase in India because they are considered gold the safe and sound haven investment as a financial asset as well as jewellery. World Gold Council report says that India stands today as the world s largest single market for gold consumption. The crude oil price is an essential erratic variable that operates as a channel during which the exchange rates and stock prices are related, with the objective that the oil importing countries policy makers should keep an eye on the sound effects of changes in oil prices levels on their own economies and stock markets There is a need to widen this definition including macro and other market indicators (such as crude price, exchange rate, interest rate, inflation) significant to the impact to assist reach our intention at more vigorous practical study This may perhaps be a promising area for upcoming study in India. Page 66

8 References:- Adrangi, B., Chatrath, A., Raffiee, K. (2003) Economic activity, inflation and hedging: The case of gold and silver investments. The Journal of Wealth Management 6: Blose, L.E. (2010) Gold prices, cost of carry, and expected inflation. Journal of Economics and Business 62: Capie, F., Terence, C.M., Wood, G. (2005) Gold as a hedge against the dollar, International Financial Markets, Institution and Money 15: Kannan, R. (2010) An Econometric Analysis. World Gold Council: Larsen, A.B., McQueen, G.R. (1995) REITs, real estate and inflation. Lessons from the gold market. Journal of Real Estate Finance and Economics 10: Mukhuti. Somnath, Bhunia, Amalendu.(August, 2013). Is it true that Indian gold price influenced by Indian stock market reaction? Journal of Business Management and Economics Vol. 4(8): , Perry Sadorsky. (1999) Oil price shocks and stock market activity. Energy Economics. 21(5): Singh Sashikant (2012) Gilt Edged paper. Dalal Street. Investment Journal. Vol.27.No.2, 15 January 2012: Sherman, E.J. (1983) A gold pricing model. Journal of Portfolio Management 9: WGC (2010) World Gold Council. The 10-year gold bull market in perspective, World Gold Council: accessed 20April accessed 25 April accessed 15 April 2014 Page 67