COMMONWEALTH JOURNAL OF COMMERCE & MANAGEMENT RESEARCH AN ANALYSIS OF RELATIONSHIP BETWEEN GOLD & CRUDEOIL PRICES WITH SENSEX AND NIFTY

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1 AN ANALYSIS OF RELATIONSHIP BETWEEN GOLD & CRUDEOIL PRICES WITH SENSEX AND NIFTY Dr. S. Nirmala Research Supervisor, Associate Professor- Department of Business Administration & Principal, PSGR Krishnammal College for Women, Peelamedu, Coimbatore Deepthy. K Research Scholar- PhD, Department of Business Administration, PSGR Krishnammal College for Women, Peelamedu, Coimbatore ABSTRACT This paper attempts to find the inter relationship between gold and crude oil prices with Sensex and Nifty. This paper takes into account the Gold and Crude oil (WTI) traded in MCX for the period 1/1/2010 to 30/10/2015. The co-movement of gold and crude oil prices are then analysed with the Sensex and Nifty prices corresponding to the period. An ADF test is applied to find if the series have unit root or not. Correlation analysis is applied to find out the degree of correlation. Further regression analysis is used to understand the interdependence between gold and crude oil with Sensex and Nifty. Key Words: Crude oil, Gold, relationship, sensex, nifty 33

2 INTRODUCTION India accounts for 30% of the global market for Gold. Gold is an integral part of lives in India. However the domestic production of gold is minimal. Much of the demand of gold is met by imports. Most of the gold purchased by Indians are consumed in the traditional form of jewellery. Even for the purpose of investment they prefer to store in the physical form. However with the introduction of Gold Exchange traded funds (Gold ETFs) in 2007, these trends were expected to change. India was the fourth largest consumer of crude oil and petroleum products in the world in 2014 after United States, China and Japan. Oil imports constitute about 78.6% of India s total domestic oil consumption in Boosted by fallen crude prices, India is expected to overtake Japan to become the world s 3rd largest oil consumer, at about 4.1 million in Since 2005, India has been responsible for 20% of incremental global oil demand increase, versus 55% for China. The gold, crude oil, Sensex and Nifty are variables with similar characteristics. The prices of all these are determined in free markets and determine the collective expectation of the economy. The expectation of an investor about what the future would be is reflected in the prices of these variables. So an analysis of interdependence would be helpful for an investor to know how Gold and crude oil prices affect stock market Indices Sensex and Nifty REVIEW OF LITERATURE (Šimáková, 2011) analysed the relationship between oil and gold prices. The study revealed that there is a strong correlation and long run equilibrium relationship between them. (Bapna, I.,et.al 2012) studied the dynamics of macroeconomic variables affecting innovation in gold. The study used growth rate, exchange rate, interest rate, inflation, NSE Index, BSE Index, foreign reserves, fiscal deficit and GDP were considered as the variables explaining macro economic variables. The study revealed that gold works as a commodity for consumption and 34

3 investment. The study concluded that gold prices reflect growth rate and gold can be used as an instrument to hedge inflation. (Joshi, 2009)studied the impact of fluctuations of stock, forex and crude oil on gold. The study revealed that the coefficient of determination is moderately high for econometric relationship with gold. (Bhunia, 2013)studied the cointegration and causal relationship among crude price, domestic gold price and financial variables. The study revealed that all the variables are closely interlinked. (V.Prabhakaran, 2014) studied dynamic interactions of macroeconomic variables and stock market movements in India. The study revealed that oil price and exchange rate is having a significant impact on stock market. The study concluded that exchange rate is having a adverse impact on stock market and gold is having a positive impact on stock market. From the review of earlier literature review it is observed that large number of studies have been made to study the effect of financial variables to macro economic variables. But studies made to analyse the combined effect of gold and crude oil is few. This paper is an attempt to analyse the combined effect of gold and crude oil to the financial variables. RESEARCH METHODOLOGY The sample period for this study is from 01/01/2010 to 30/10/2015. Monthly prices of Gold (MAUc1) and Crude oil (MCGBc1), traded in MCX are obtained from the website of MCX and monthly Sensex and Nifty closing prices are obtained from the website BSE and NSE respectively. Trend line evaluation, Augmented Dickey Fuller test, Correlation and regression analysis are used in the study. OBJECTIVES OF THE STUDY To know the impact of gold prices on Sensex and Nifty To know the impact of crude oil prices on Sensex and Nifty 35

4 LIMITATION OF THE STUDY The period of study is between 01/01/2010 to 30/10/2015, which is medium term. The result of the inter relationship may vary in the long term. HYPOTHESIS H 0 = Gold Price does not have an impact on Sensex and Nifty H 0 = Crude oil Prices does not have an impact on Sensex and Nifty EMPIRICAL RESULTS TREND LINE EVALUATION Sensex and Gold Chart : 1 Trend movement of Gold and Crude oil WTI with Sensex and Nifty Jan 01, 2010 Jun 01, 2010 Nov 01, 2010 Apr 01, 2011 Sep 01, 2011 Feb 01, 2012 Jul 01, 2012 Dec 01, 2012 May 01, 2013 Oct 01, 2013 Mar 01, 2014 Aug 01, 2014 Jan 01, 2015 Jun 01, Crude oil WTI and Nifty Gold Price( In INR) Sensex Price In INR NiftyPrice Crude oil WTI Price in INR Source: Monthly Closing prices of gold and crude oil are obtained from website of MCX and Sensex and Nifty are obtained from BSE and NSE respectively. Interpretation: From the Chart No: 1 it can be seen that Gold and Crude oil prices move in same direction, but with respect to Sensex and Nifty they move in opposite directions. The relationship can further be analysed using correlation and regression analysis. 36

5 AUGMENTED DICKEY FULLER TEST Table: 1 ADF test for Unit root for Gold, Crude oil, Sensex and Nifty at first difference Variables With Constant With Constant and Trend t-statistic p-value t-statistic p-value Gold Crude oil Sensex Nifty Source: Author s Calculations From the table no:1, it can be seen that the p-values of all the variables are less than So it can be concluded that the variables are stationary at their first difference. To do Correlation and Regression analysis, Log values of the variables has been used. CORRELATION MATRIX Table: 2 Correlation coefficients, using the observations 2010: :10 LGold LSensex LCrudePrice LNifty LGold LSensex LCrudePrice LNifty Source: Author s Calculations From the Table: 2 it can be seen that gold is having a low positive correlation with Sensex (0.2233) and Nifty ( ). This means that the variables are moving in same direction. Crude 37

6 oil is having a positive correlation with gold (0.5540) but a negative correlation with Sensex( ) and Nifty( ) The relationship can further be analysed using Regression analysis REGRESSION ANALYSIS BETWEEN SENSEX, GOLD AND CRUDE PRICES Table 3: OLS, using observations 2010: :10 (T = 70) Dependent variable: LSensex Coefficient Std. Error t-ratio p-value const < *** LGold *** LCrudePrice *** Mean dependent var S.D. dependent var Sum squared resid S.E. of regression R-squared Adjusted R-squared F(2, 67) P-value(F) Log-likelihood Akaike criterion Schwarz criterion Hannan-Quinn Rho Durbin-Watson Source: Author s Calculation In the table no.3, The Adjusted R squared value is This shows that 21% of variation in Sensex price can be explained through the variation in gold and crude oil prices. From the table no.3, it can be concluded that there is a positive correlation between gold price and Sensex price. By observing the table above, it is evident that for 1% increase in gold price, there is 0.51% increase in Sensex price. The standard error is 0.13 which is not low, which means that error in linear relation is not high. So the null hypothesis Gold price does not have an impact on Sensex price is rejected. From the table no. 3 it can also be concluded that there is a negative correlation between Crude oil and Sensex. For an increase in price of crude oil by 1% there is a decrease in Sensex 38

7 price by 0.40%. So the null hypothesis Crude oil price does not have an impact on Sensex price is rejected. JOINT SIGNIFICANCE TEST Restriction set This test is conducted to know the overall model significance. H 0 =β 2 =β 3 =0 H 1 =β i 0 for at least one i 1: b[lgold] = 0 2: b[lcrudeprice] = 0 Test statistic: F(2, 67) = 9.932, with p-value = Table no: 4 Restricted estimates: Coefficient Std. Error T-Ratio P-Value const e-121 *** LGold NA NA LCrudePrice NA NA Standard error of the regression = Source: Author s Calculations From the table no: 4 it is seen that the F statistic is with a p value of This means that the null hypothesis is rejected and it is concluded that the overall model is significant at 5% significant level. Residuals are tested for normality and it found to be normally distributed. REGRESSION EQUATION: LSensex = *LGold Price *Lcrudeprice 39

8 REGRESSION ANALYSIS BETWEEN NIFTY, GOLD AND CRUDE OIL PRICES Table 5: OLS, using observations 2010: :10 (T = 70) Dependent variable:lnifty Coefficient Std. Error t-ratio p-value const < *** LGold *** LCrudePrice *** Mean dependent var S.D. dependent var Sum squared resid S.E. of regression R-squared Adjusted R-squared F(2, 67) P-value(F) Log-likelihood Akaike criterion Schwarz criterion Hannan-Quinn Rho Durbin-Watson Source: Author s Calculations From the table no: 5 it can be seen that the Adjusted R squared value is This means that 23% of the variation in Nifty price can be explained through the variation in Gold and Crude oil prices. From the table no:5 it can be concluded that for 1% increase in gold price Nifty increases by 0.53%. The standard error is 0.13 which is not high, which means that error in linear relation is not high. So the hypothesis Gold prices does not have an impact on Nifty is rejected. From the table no:5 it can also be concluded that there is a negative correlation between Crude oil and Sensex. For an increase in price of crude oil by 1% there is a decrease in Nifty by 0.43%. So the null hypothesis Crude oil price does not have an impact on Nifty is rejected. JOINT SIGNIFICANCE TEST This test is conducted to know the overall model significance. H 0 =β 2 =β 3 =0 H 1 =β i 0 for at least one i 40

9 Restriction set 1: b[lgold] = 0 2: b[lcrudeprice] = 0 Test statistic: F(2, 67) = , with p-value = e-005 Table no: 6 Restricted estimates: coefficient std. error t-ratio p-value const e-117 *** LGold NA NA LCrudePrice NA NA Standard error of the regression = Source: Author s Calculations From the table no: 6 it is seen that the F statistic is with a p value of This means that the null hypothesis is rejected and it is concluded that the overall model is significant at 5% significant level. Residuals are tested for normality and it found to be normally distributed. REGRESSION EQUATION: LNifty = *LGold *LCrudeprice CONCLUSION There exists a low positive correlation between Gold and Sensex and Nifty. In short term both sensex and nifty move in same direction with gold but in the long run an increase in gold price may cause a decrease in sensex and nifty as the investors may shift from the expensive gold investment to cheaper equities. Crude oil has a negative correlation with Sensex and Nifty. By looking into regression analysis it can be concluded that increase in crude oil prices have a negative impact on Sensex and Nifty. The prices of Oil have an important role to play in deciding any company's performance. Sensex and Nifty is in turn is a function of companies 41

10 performance. So in this way both are connected to each other. The decreasing crude oil prices make many companies more efficient but any decrease beyond a point start deteriorating other oil economies who are largest consumer of India s production, in turn start consuming less because of recession. Hence it affects the company's earning on sales front thereby washing away the benefits which it received while producing the goods. So it can be concluded that decrease in crude oil prices may increase Sensex and Nifty in short and medium run but in long run, both Sensex and Crude oil prices move in same direction REFERENCES 1. Bapna, I., Sood, V., Totola, D. N. K., & Saluja, H. S. (2012). Dynamics Of Macroeconomic Variables Affecting Price Innovation In Gold: A Relationship Analysis. Pacific Business Review International, 5(1), Bhunia, A. (2013). Cointegration And Causal Relationship Among Crude Price, Domestic Gold Price And Financial Variables- An Evidence Of Bse And Nse. Journal Of Contemporary Issues In Business Research, 2(1), Joshi, V. K. (2009). Impact Of Fluctuation : Stock / Forex / Crude Oil On Gold. Scms Journal Of Indian Management, (October - December), Šimáková, J. (2011). Analysis Of The Relationship Between Oil And Gold Prices Analysis Of The Relationship Between Oil And Gold Prices, (January 2011). Retrieved From 5. V.Prabhakaran. (2014). Dynamic Interactions Of Macroeconomic Variables And Stock Market Movements In India. Global Management Review, 8(4), Narang, S. P., and Raman Preet Singh. (2012)"Causal Relationship between Gold Price and Sensex: A Study in Indian Context." Vivekananda Journal of Research. 1(1) 7. Amalendu Bhunia and Somnath Mukhuti (2013), The impact of domestic gold price on stock price indices-an empirical study of Indian stock exchanges, Universal Journal of Marketing and Business Research ISSN: Vol. 2(2) pp

11 8. Pooja Singh(2014), An Empirical Relationship Between Selected Indian Stock Market Indices And Macroeconomic Indicators, IMPACT: International Journal Of Research In Business Management (IMPACT: IJRBM) ISSN(E): X; ISSN(P): Vol. 2, Issue 9, Tarak Nath Sahu and Kalpataru Bandopadhyay, Debasish Mondal ( 2014 ), An empirical study on thedynamic relationship between oilprices and Indian stock market, Managerial Finance Vol. 40 No. 2,pp ,Emerald Group Publishing Limited DOI /MF Quora. (2016). Retrieved 2016, from Quora: