GOLD PRICE MOVEMENTS IN INDIA AND GLOBAL MARKET

53 GOLD PRICE MOVEMENTS IN INDIA AND GLOBAL MARKET Shaik Saleem, Research Scholar, Department of Management Studies, Sri Venkateswara University, Tirupati, Andhra Pradesh, India. Dr. M. Srinivasa Reddy, Professor, Department of Management Studies, Sri Venkateswara University, Tirupati, Andhra Pradesh, India. Shaik Karim, Research Scholar, GITAM School of International Business, GITAM University, Visakhapatnam, Andhra Pradesh, India. ABSTRACT The price of gold varies from country to country as there are some very influential factors to affect its rate nationally and internationally. In the international markets when in gold is traded online, its price depends upon the dominated currency that is US Dollar in most of the online trading markets. In online commodity exchanges, the Live Gold Rates are updated time to time whereas in the physical markets the prices changes and vary from country to country. This paper attempts to study the gold prices movement in INR and Key Currencies, impact of exchange rate, inflation rate and gold reserves on gold prices movement in India. It was found that there exists positive and significant correlation between the gold prices movement in INR and Key Currencies and there exists seasonal variation in gold prices movement between INR and key currencies. The study also shows significant impact of exchange rate, inflation rate and gold reserves on gold prices movement in India. Keywords: Currencies, Exchange rate, Gold reserves, India, Inflation rate, Seasonal variation.

54 Introduction: Thousands of years ago people found shiny rock in a creek and thereby human race got introduced to the Gold for first time. Gold, the metal, particularly the yellow metal witnessed a drastic change in its characteristics. In ancient days it was luxurious for the mankind; today the same gold is the need for mankind. People they prefer the need to have the investment in the gold for various reasons. It is evident from the history the importance of gold as the best medium of exchange between countries, but today gold has lost its importance as there was an end of determining foreign exchange rate in terms of gold in Bretton Woods Agreement. The price of gold varies from country to country as there are some very influential factors to affect its rate nationally and internationally. In the international markets when in gold is traded online, its price depends upon the dominated currency that is US Dollar in most of the online trading markets. In online commodity exchanges, the Live Gold Rates are updated time to time whereas in the physical markets the prices changes and vary from country to country. The variations in Gold Rates are similar to price of crude oil. The crude oil rate changes in the international markets and conversely affects the national markets of the different countries. The crude oil price is given in US Dollars and then the countries calculated their local price of petroleum products on various factors. Countries have different policies for the export and import of the goods that is why they design the policies accordingly which results in unlike gold rates among their neighboring and other countries. The variation in prices is due to the cost of physical delivery, storing and ordering cost, local taxation and conversion of price from US Dollar to local currency. Following are some of the factors that affect the prices in different countries. Inflation affects the gold rate: Gold is an inflation hedge that is used by the countries to secure their economy by hedging gold against their inflation rate. Mostly the developed countries hedge gold to balance their economy that may be disturbed by the increase in inflation. The gold rate goes up with the increase in inflation rate and the countries that hedge gold against inflation will not face recession. It is one of the financial instruments that help the economy in stabilizing its position in the international community. Some of the developing countries have increased inflation rates that may be affected by the decrease in the foreign currency rate. Every country has its own policy-makers who advent economic policies according to the needs of the country to bring out the maximum result in developing their economy that's why the price of gold varies from country to country. Import tax and duties affect gold rates: Countries impose tax to force the investors and importers contribute in the national economy. Some of the taxes are imposed directly while some of them are indirectly levied. Gold is a premium commodity that brings more revenue to the tax authorities and stability in the economy. India's revenue from import of gold almost doubled in 2010-11 as compared to the previous year, revenue turnover in respect of customs duty collected from the import of gold was Rs 2,553.52 crore in 2010-11 against Rs 1,567.64 crore in 2009-10. The gold rates are therefore subject to increase with the addition of import tax and duties. Every country has its own Income Tax ordinance and rules to charge tax over the imports of global homogenous commodities. Gold is one of those durable commodities that are taxed differently indifferent countries. That's why the Live Gold Rates tend to vary from country to country. Central Banks affect the gold rates: The central bank of a country plays a leading role in setting the price of gold as it often hedge the gold against its central reserves. The banks and gold mining companies can manipulate the gold prices as they have a large amount of raw and refined gold in their reserves. Banks can affect the rate in case they undergo the sale or purchase of gold in bulk or the mine-owners increase the production or reduce the output of gold. Gold is traded internationally but it is treated in a dissimilar way when it is comes to the national boundaries. The central banks have the amount of gold and they may buy more gold when they find a decrease in their gold reserves against their holdings. Hence, in this context this study is undertaken to observe any relationship in gold price movements in India and the Global Market and to observe the impact of various factors on gold prices in India. Objectives of the Study: 1. To study the trend in gold price movements in Indian rupee and key currencies of the world. 2. To identify the association between gold price movement in Indian rupee and key currencies of the world. 3. To study the impact of foreign exchange rate between INR/USD, Inflation rate and Gold Reserves on gold prices in India. Literature Review: There are many studies Koutsoyiannis (1983), Sjaastad (1986), Cengiz Toraman (2011) and Sujit (2011) investigating the price of gold in the literature. These studies dealt with different variable and determined the relationship between gold prices and US

55 dollar, inflation rate, stock return and oil prices in general. Most of studies deal with gold price movements in US and other developed countries, Indian based studies are less in number, and these studies are mostly in relation to stock market. Hence, there was a need to carry this study. Research Methodology: For the purpose of study to make comparison between the gold price movement in Indian market and Global market, historical gold prices in INR, USD, GBP, JPY, CAD, EUR and CHF on monthly and yearly basis were taken for 32 years from 1981 to 2012 from World Gold Council. And historical exchange rates of INR/USD, Inflation rates in India and Gold Reserves in Metric tons in India from 1981 to 2012 were taken. Data were analyzed in this study by using seasonal index by simple average method, correlation analysis, and regression analysis and for interpreting the results of hypothesis testing student s t-test and ANOVA have been used. Hypotheses: As the study is about knowing the gold price movements in various markets, which may show variations in the trend of all markets. Hence, following hypotheses were developed: 1. To test the significance of the value of Karl Pearson co-efficient between the gold price movement in INR and key currencies, the following hypothesis has been developed. H0: There is no association between gold price movements in INR and key currencies. H1: There is an association between gold price movements in INR and key currencies. 2. To test the significance of seasonal variability of Gold prices in Indian and Key currencies market, following hypothesis has been developed: H0: Seasonal variability of gold prices in all the markets does not differ significantly. H1: Seasonal variability of gold prices in all the markets does differ significantly. Results and Discussion: Seasonal Variation in the Gold Prices in Indian and Key Currencies market: The present study is a time series study covering a period from 1981 to 2012. This period was chosen because it covers both pre and post liberalization period, which may show a good variability as before 1991 the gold prices were not determined by the market forces but rather fixed by the Government from time to time and also cover the period of crisis in financial markets. From the exhibit -1 it is clear that the gold price movements shown a downward trend in the years 1981-1982, and thereafter showing increasing trend up to 1996. From 1997 again the gold prices in India started falling down and geared up from 2000 and continuing the same trend till. Further, the gold price movements in US Gold Market is not showing a constant trend over a period of time from 1980 2004. From 2004 it is observed a good increasing trend in gold price in US at higher pace. Exhibit 1: Gold Price Movements in INR and Key Currencies from 1981 to 2012 Year INR USD EUR JPY GBP CAD CHF 1981 3969.5 459.7 361.0 100991.2 226.8 551.2 902.8 1982 3560.1 375.8 345.7 93804.8 215.8 463.2 765.8 1983 4279.2 424.2 440.3 100874.6 279.6 523.1 890.3 1984 4066.2 360.4 425.7 85459.1 269.7 466.2 844.2 1985 3888.6 317.3 394.2 75457.9 246.4 433.0 776.7 1986 4615.5 367.5 351.0 61646.3 250.9 510.5 657.3 1987 5751.8 446.5 365.9 64389.5 272.4 591.6 664.5 1988 6041.6 437.0 351.9 55981.8 245.5 538.1 638.2 1989 6154.4 381.4 325.6 52580.7 233.0 451.6 623.1 1990 6695.9 383.5 282.8 55491.7 215.9 447.5 533.2 1991 8205.2 362.2 278.0 48692.8 205.3 414.9 518.8 1992 9632.6 343.7 253.5 43546.7 195.7 415.3 483.2 1993 11189.9 359.8 301.1 39894.6 239.6 464.4 531.7 1994 12047.1 384.0 319.5 39243.0 250.8 524.3 524.9 1995 12450.7 384.2 292.0 36109.8 243.5 527.3 453.9 1996 13713.1 387.7 300.8 42140.0 248.7 528.7 478.9 1997 12006.5 331.1 292.3 40022.4 202.3 458.0 480.2

56 1998 12128.9 294.2 264.3 38473.8 177.5 436.2 426.4 1999 12001.6 278.8 261.5 31666.5 172.2 414.2 418.5 2000 12530.1 279.0 302.6 30073.4 184.2 414.3 471.0 2001 12786.8 271.0 302.8 32914.8 188.2 419.7 457.2 2002 15056.0 310.0 328.2 38760.5 206.4 486.6 481.6 2003 16915.2 363.5 321.2 42060.3 222.3 508.3 488.5 2004 18517.4 409.2 329.1 44230.2 223.3 531.9 508.0 2005 19624.6 444.9 358.6 49117.4 245.1 538.4 555.2 2006 27372.2 604.3 480.8 70233.8 327.9 685.2 756.4 2007 28733.2 696.7 507.4 81849.4 347.7 745.0 833.9 2008 37768.7 871.7 593.3 90251.5 472.3 925.5 941.3 2009 47025.2 973.0 697.8 90862.3 621.9 1105.7 1053.4 2010 55973.2 1224.7 925.1 107171.6 792.5 1261.1 1274.1 2011 73394.9 1568.6 1128.4 124770.9 979.1 1553.5 1388.6 2012 89061.5 1668.1 1297.2 133141.5 1052.2 1666.7 1563.5 Source: World Gold Council It is evident from the exhibit - 1 that the gold price movements in European Gold Market follows the same line of trend of US gold market, fluctuations in the gold prices from 1980 2004 and thereafter a high speed increasing trend in gold prices. But it was found decreasing trend in the gold prices in the Japan gold market from 1981 1995, bit increase in the gold prices in the year 1996 and again down trend up to 2001. Thereafter increasing trend is observed in the gold prices. London gold market had witnessed fluctuations from 1980 to 2004 and from 2005 onwards an increasing trend is noticed in the gold prices in London. The gold markets in Canada and Switzerland also show fluctuations in gold prices from 1981 to 2000, later years increasing trend in gold prices is observed. From the exhibit-1 it is clear that somehow seasonal variations are there in the Indian gold market and the other markets further the seasonality is not varying at high rate in all the markets on an average. The demand for gold is somewhat high in and changing time to time in India; this may be due to India is one of the major countries of consumer of gold. Further the demand for gold in India increases from the August and continue up to December as these are the festivals months, people consider purchasing of gold as good act during these months. As the seasonal indices observed with minimum of 93.68% and maximum of 108% is varying more than the other countries seasonal indices having a range between 99% as minimum to 103% as maximum on an average. It was found high positive correlation between the gold price movements in INR and USD, EUR, GBP, CAD, CHF and JPY of 0.961, 0.944, 0.954, 0.967, 0.804 and 0.634 respectively. Showing increase in gold price in said currencies will lead to increase in the gold price in INR at higher proportion in same direction or vice-versa. Further on testing the significance of correlation, the relationship between INR and USD, EUR, GBP, CAD, CHF AND JPY is found to be significant in exhibit - 2 at 5% level of significance. Hence, there is a correlation between gold price movements in INR and USD, EUR, GBP, CAD and CHF. With the help of ANOVA it was found that the gold price movements in all the currencies do not differ significantly at 5% level of significance shown in Exhibit 3. If to observe the prices in months then there exists significant variability. Exhibit 2: Correlation analysis between Gold Price in INR and Key Currencies INR USD EUR JPY GBP CAD CHF t value p-value INR 1 USD 0.961 1 19 0 EUR 0.944 0.983 1 15.59 0 JPY 0.634 0.792 0.821 1 4.49 0 GBP 0.954 0.991 0.99 0.78 1 17.51 0 CAD 0.967 0.995 0.982 0.771 0.992 1 20.78 0 CHF 0.804 0.915 0.943 0.956 0.916 0.904 1 7.39 0 Exhibit 3: Average Seasonal Indices of Gold Prices in INR, USD, EUR, JPY, GBP, CAD and CHF Month INR USD EUR JPY GBP CAD CHF Jan 93.7 97.7 97.3 99.6 97.3 98.9 99.1 Feb 95.3 98.5 98.7 100.3 98.7 99.7 100.5

57 Mar 95.6 97.8 97.5 99.2 98.4 98.6 98.9 Apr 95.5 98.3 97.9 100.1 97.8 98.5 99.4 May 97.7 98.8 99.1 99.6 98.6 98.9 100.2 Jun 98.4 98.3 99.3 99.3 98.5 98.4 99.6 Jul 99.1 98.5 99.2 99.1 98.2 98.1 98.8 Aug 100.9 99.8 100.5 99.8 99.5 99.3 99.3 Sep 104.2 102.1 102.5 101.5 102.3 101.3 101.4 Oct 104.7 102.6 102.1 100.6 102.8 101.9 100.8 Nov 107.3 103.6 103.0 100.4 103.7 103.0 101.2 Dec 107.7 103.7 103.0 100.5 104.2 103.5 100.9 ANOVA Source of Variation SS df MS F P-value F critical Months 344.6166283 11 31.32878439 13.6777363 0.00 1.936958 Currencies 0.000623457 6 0.00010391 0.00 1 2.23948 Error 151.1726593 66 2.290494837 Total 495.789911 83 Fig. 1.2 : Seasonal Indices of Gold Prices in INR, USD, EUR, JPY, GBP, CAD and CHF It was found in the study from exhibit - 4 that the correlation between the gold price movement in India and exchange rate between INR/USD works out to 0.64, low positive correlation of 0.08 found between inflation rate and gold price movement and high positive correlation of 0.86 found between gold reserve in metric tons in India and gold prices in India. Further it was found significant relationship between exchange rate and gold prices in India. If exchange rates goes up there is possibility that the gold prices in India will move up relatively high. This could be because of in International Market the value of gold is determine in US Dollar and US is one of the major gold producers of world. And countries they purchase gold from IMF as reserve which is also denominated in US Dollars. Moreover there is a significant relationship between gold reserves and gold prices in India and gold prices in India is having insignificant relationship with the inflation. Indicates changes in the gold reserves will cause good change in gold prices and change in inflation rate may cause less change in gold prices. Exhibit 4: Correlation between Gold Price Movements in India and Exchange Rate between INR/USD, Inflation rate and Gold Reserves INR INR/USD Inflation Rate Gold Reserves t value p-value INR 1 INR/USD 0.641 1 4.57 0 Inflation Rate 0.08-0.313 1 0.43 0.66 Gold Reserves 0.86 0.69 0.078 1 9.22 0 Impact of Exchange rate INR/USD on Gold Prices in India: The impact of Exchange rate on gold prices movement in India is change in Re. 1 in exchange rate will cause change of Rs.

58 882.42 in the gold prices in India through regression analysis shown in exhibit 5. And the effect of exchange rate on gold price movement in India found significant by using both t-test and ANOVA at 5 % level of significance. This may be because currency plays a very important role in determining commodity prices and rupee depreciation has been a major factor that has affected prices of commodities in the Indian markets. Taking the example of gold itself, the yellow metal has witnessed sharp gains in the Indian markets as a weaker rupee supported gains. And as many countries they import gold from international market, which is mostly represented in terms of US Dollar. Exhibit 5: ANOVA df SS MS F Significance F Regression 1 5409004657 5.41E+09 20.91757 7.74447E-05 Residual 30 7757599406 2.59E+08 Total 31 13166604064 Coefficients Coefficients Standard Error t -Stat P-value Intercept -9383.353924 6820.790917-1.3757 0.1791 INR/USD 882.4184812 192.9385298 4.573573 7.74E-05 Impact of Inflation rate on Gold Price Movement: The impact of inflation rate on gold prices movement in India is change in 1% in inflation rate will cause change of Rs. 506.14 in the gold prices in India through regression analysis shown in exhibit 6. And the effect of inflation rate and gold price movement in India found insignificant by using both t-test and ANOVA at 5 % level of significance. This may be due to rupee depreciation stresses upon imports becoming expensive. As in the international market gold prices are denominated in US dollars, the rise in the exchange rate could affect the commodity prices which are imported from the other countries. Later athese imports become expensive this can cause rises in the domestic prices of the commodities. ANOVA Exhibit 6: ANOVA df SS MS F Significance F Regression 1 77832580.48 77832580 0.17839546 0.675767669 Residual 30 13088771483 4.36E+08 Total 31 13166604064 Coefficients Coefficients Standard Error t Stat P-value Intercept 14899.84164 10327.81593 1.44269 0.159468126 Inflation Rate 506.1440585 1198.346036 0.422369 0.675767669 Impact of Gold Reserves in metric tons in India on Gold Price Movement in India: The impact of Exchange rate on gold prices movement in India is change in 1 unit in gold reserve will cause change of Rs. 236.96 in the gold prices in India through regression analysis shown in exhibit 7. And the impact of gold reserves on gold price movement in India found significant by using both t-test and ANOVA at 5 % level of significance. It was in the year 2009 when RBI purchased 200 metric tons worth $6.7 billion of gold from International Monetary Fund (IMF) as part of the foreign exchanges reserves management operations, which was highest share in the total gold reserves sold by the IMF. And made the gold prices to go up in the international market and national market. Exhibit 7: ANOVA ANOVA df SS MS F Significance F Regression 1 9735181805 9735181805 85.11207077 2.88845E-10 Residual 30 3431422259 114380742 Total 31 13166604064

59 Coefficients Coefficients Standard Error t Stat P-value Intercept -66043.75651 9407.29945-7.02047988 8.39171E-08 Gold Reserve 236.9617285 25.685181 9.225620346 2.88845E-10 Impact of Exchange rate INR/USD, Inflation rate and Gold Reserves on Gold Prices in India: The joint impact of exchange rate between INR/USD, Inflation rate and Gold Reserves in metric tons on gold price movement in India is studied through multiple regression and results presented in exhibit 8. Further the regression statistics found significant at 5 per cent level of significance for 3 and 28 degrees of freedom. The effect of inflation rate and exchange rate on gold price movement in India found insignificant because it is rupee depreciation which is reflected in inflation and inflation rate later affects the exchange rate. And the impact of gold reserves in metric tons on gold price movement in India found significant. Exhibit 8: Impact of Exchange rate INR/USD, Inflation rate and Gold Reserves on Gold Prices in India Regression Statistics Multiple R 0.864016481 R Square 0.746524479 Adjusted R Square 0.719366388 Standard Error 10917.56747 Observations 32 ANOVA - Table df SS MS F Significance F Regression 3 9829192240 3.28E+09 27.48810528 1.71138E-08 Residual 28 3337411824 1.19E+08 Total 31 13166604064 Coefficients Coefficients Standard Error t Stat P-value Intercept -65602.30028 10592.78596-6.19311 1.09018E-06 INR/USD 184.9683459 210.1672976 0.880101 0.386296514 Inflation Rate 401.8976552 729.9445275 0.550587 0.586283509 Gold Reserve 210.1479148 40.04108164 5.248308 1.407E-05 Conclusion: From the present study it is clear that there exists no significant difference in gold price movements in INR and Key Currencies but, if month wise to consider then there exists significant difference. Further the relationship between the gold price movement in India and Key currencies market were found significant, which may affect the gold price movement in India due to change in gold price of that particular currency. Further the change in INR/USD does effect significantly the gold price movements in India in a higher manner i.e., change in exchange rate INR/USD will bring comparatively much change in the gold price in India. The impact of inflation rate found lesser than exchange rate and also insignificant as it is having low degree of association, further gold reserves is having lesser impact than exchange rates and inflation rates, still it has significant impact due to high degree of association with gold price movements. When the joint impact of exchange rate, inflation rate and gold reserves studied together on gold price movements in India, also shows significant and considerable impact. Moreover, if INR get start floating in the International Market then there is possibility that change in INR/USD will affect more the gold prices in India. References: [1] Aggarwal, R., & Soenen, L. A. (1988). The nature and efficiency of the gold market. The Journal of Portfolio Management, 14, 18-21. [2] Baur, D. G., & Thomas K. McDermott (2010). Is Gold a Safe Haven? International Evidence, Journal of Banking & Finance, 34, 1886 1898. [3] Cengiz Toraman et.al. (2011). Determination of Factors Affecting the Price of Gold: A Study of [4] MGARCH Model. Business and Economic Journal, 2(4), 37-50. [5] Deutsche, W. (2011). Central banks and major investors join gold rush. Retrieved from http://www.dwworld.de/dw/article/0,,15292029,00.html.

60 [6] Koutsoyiannis, A. (1983). A Short-Run Pricing Model for a Speculative Asset, Tested with Data [7] from the Gold Bullion Market, Applied Economics, 15, 563 581. [8] Lakshmi K (2007). Should India add more Gold to its Foreign Exchange Reserves, Retrieved from http://ssrn.com/abstract=977127. [9] Mahdavi, Saied & Zhou, S., (1997). Gold and Commodity Prices as Leading Indicators of Inflation: Tests of Long-run Relationship and Predictive Performance, Journal of Economics and Business, 49, 475-489. [10] Mani Ganesh & Srivyal Vuyyuri (2004). Gold Pricing in India: An Econometric Analysis, Retrieved from http://ssrn.com/id=715841. [11] Salent, S., & Henderson, D. (1978). Market Anticipation of government policies and the price of gold, Journal of Political Economy, 86, 227-249. [12] Sjaastad, L., & Scacciavillani, F., (1996). The price of gold and the exchange rate, Journal of International Money and Finance. 15, 879-897. [13] Sujit, B. & Rajesh Kumar, B (2011). A Study on Dyanamic Relationship Among Gold Price, Oil Price, Exchange Rate and Stock Market Returns, International Journal of Applied Business and Economic Research, 9(2), 145-165. [14] Tandon, K., & Urich, T. (1987), International Market Response to Announcements of U.S. Macroeconomic Data, Journal of International Money and Finance, 6(1), 7l-84 [15] World Gold Council (2009, 2010 and 2011), Quarterly Gold Demand Trends, Retrieved from (http:www.gold.org). ****