Sr. Topic Page No.

No.

1 Acknowledgement 4

2 Executive Summary 5

3 Introduction 6-7

4 Overview of Gold Industry 8

5 Gold consuming Countries 13

6 Supply and gold producing countries 14-16

7 Literature review 18-23

8 Research methodology 23-24

9 Findings 25-39

10 Conclusion 41-42

11 Appendix 42-43

12 Bibliography 44-48

EXECUTIVE SUMMARY
1
 “Gold” India’s most popular metal has shown three times increase in its price
since the year 2000 till the year 2010. History of gold indicates that Gold price
certainly follow ascending price pattern but these abnormal change in price have
never occur before.
This report says about, what can be the various reasons of this sudden change in
trend.
This report examines the relationship of gold price with various independent
variables like Sensex, Interest rate (PLR), Inflation, Oil price and exchange rate.
The study uses the Indian data since the year 2000 till date. The regression method
is used to know the relationships.
These helps in determining to what extent one varies with other. Report also looks
after the trends in Indian Gold Market.
The future of the gold & gold price movements are determined by the perception
of gold as a store of value rather than its fundamentals as a commodity.

INTRODUCTION

2
The gold market in India is predominantly a market for buying and selling physical
gold. Indians have a huge fascination for gold. This is evident in the fact that India
is the largest consumer as well as importer of gold in the world. Gold plays a very
important role in the social, religious and cultural life of Indians. Indian Gold
Market looks poised to achieve greater heights given the fascination for gold in the
country. India consumes about 800 MT of gold which accounts to about 20%
consumption of gold globally. More than 50% of this is used for making gold
jewelry.
Gold is valued in India as a savings and investment vehicle and is the
second preferred investment after bank deposits. India is also the world's largest
consumer of gold in jewelry as investment.
In July 1997 the RBI authorized the commercial banks to import gold for sale or
loan to jewelers and exporters. At present, 13 banks are active in the import of
gold. This reduced the disparity between international and domestic prices of gold
from 57 percent during 1986 to 1991 to 8.5 percent in 2001.
Gold is also considered as a public investment. Many countries have huge
gold reserves. Countries like India, USA are supposed to have huge gold reserves
that can be sold in times of need. It also gives these countries an edge in various
financial deals. Various banks also have huge reserves of gold that are used in
times of crisis in the economy. This gold is sold at times of economic crisis to
stabilize the economy.
Gold is considered better during times of recession. Gold is purchased more
during a down turn in economy. This is because the companies might start
reducing production due to declining sales. Due to this, the stock prices will go
down. In this scenario, Gold is the safest option to invest in. Though the return on
investment may not be as high as other investment options, safety and good value
for money are very important in times of recession.
3
 Industrial, medical and dental uses account for around 11% of gold demand
(an annual average of over 440 tonnes from 2004 to 2008). Gold's high thermal and
electrical conductivity, and its outstanding resistance to corrosion, explain why
over half of all industrial demand arises from its use in electrical components.
Gold's use in medical applications has a long history and today, various biomedical
applications make use of its bio-compatibility, resistance to bacterial colonization
and corrosion, and other attributes. Recent research has uncovered a number of
new practical uses for gold, including its use as a catalyst in fuel cells, chemical
processing and controlling pollution. The potential to use nanoparticles of gold in
advanced electronics, glazing coatings, and cancer treatments are all exciting areas
of scientific research.

DEMAND AND SUPPLY

4
Gold's extensive appeal and functionality, including its characteristics as an
investment vehicle, are underpinned by the supply and demand dynamics of the
gold market.

Demand

5
Demand for gold is widely spread around the world. East Asia, the Indian sub-
continent and the Middle East accounted for 70% of world demand in 2008. 55%
of demand is attributable to just five countries - India, Italy, Turkey, USA and
China, each market driven by a different set of socio-economic and cultural
factors. Rapid demographic and other socio-economic changes in many of the key
consuming nations are also likely to produce new patterns of demand.

Jewellery demand

Jewellery consistently accounts for over two-thirds of gold demand. In the 12

months to December 2008, this amounted to around US$61 billion, making
jewellery one of the world's largest categories of consumer goods. In terms of retail
value, the USA is the largest market for gold jewellery, whereas India is the largest
consumer in volume terms, accounting for 24% of demand in 2008.

Indian gold demand is supported by cultural and religious traditions which are not
directly linked to global economic trends.

It should be noted, however, that the economic crisis and the consequent
recessionary pressures that developed over 2007 and 2008 had a significant
negative impact on consumer spending and this, in turn, resulted in the reduced
volume of jewellery sales, particularly in western markets.

Generally, jewellery demand is driven by a combination of affordability and

desirability by consumers, and tends to rise during periods of price stability or
gradually rising prices, and declines in periods of price volatility. A steadily rising
price reinforces the inherent value of gold jewellery, which is an intrinsic part of its
6
desirability. Jewellery consumption in the developing markets was, until fairly
recently, expanding quite rapidly following a period of sustained decline, although
recent economic distress may have stalled this growth. But several countries,
including China, still offer clear and considerable potential for future growth in
demand.

Investment demand

Because a significant portion of investment demand is transacted in the over-the-

counter market, it is not easily measurable. However, there is no doubt that
identifiable investment demand in gold has increased considerably in recent years.
Since 2003 investment has represented the strongest source of growth in demand,
with an increase in the last five years in value terms to the end of 2008 of around
412%. Investment attracted net inflows of approximately US$32bn in 2008.

There are a wide range of reasons and motivations for people and institutions
seeking to invest in gold. And, clearly, a positive price outlook, underpinned by
expectations that the growth in demand for the precious metal will continue to
outstrip that of supply, provides a solid rationale for investment. Of the other key
drivers of investment demand, one common thread can be identified: all are rooted
in gold's abilities to insure against uncertainty and instability and protect against
risk.

Gold investment can take many forms, and some investors may choose to combine
two or more of these for flexibility. The distinction between buying physical gold
and gaining exposure to movements in the gold price is not always clear, especially
since it is possible to invest in bullion without actually taking physical delivery.

7
The growth in investment demand has been mirrored by corresponding
developments in ways to invest and there are now a wide variety of investment
products to suit both the private and institutional investor

Industrial demand

Industrial, medical and dental uses account for around 11% of gold demand (an
annual average of over 440 tonnes from 2004 to 2008). Gold's high thermal and
electrical conductivity, and its outstanding resistance to corrosion, explain why
over half of all industrial demand arises from its use in electrical components.
Gold's use in medical applications has a long history and today, various biomedical
applications make use of its bio-compatibility, resistance to bacterial colonization
and corrosion, and other attributes. Recent research has uncovered a number of
new practical uses for gold, including its use as a catalyst in fuel cells, chemical
processing and controlling pollution. The potential to use nanoparticles of gold in
advanced electronics, glazing coatings, and cancer treatments are all exciting areas
of scientific research.

Top 10 Gold Consuming Countries:-

1India
2 United States
3 China
8
4 Turkey
5 Saudi Arabia
6 United Arab Emirates
7 Indonesia
8 Egypt
9 Italy
10 Pakistan

SUPPLY

Mine production

Gold is produced from mines on every continent except Antarctica, where mining
is forbidden. Operations range from the tiny to the enormous and there are several

9
hundred operating gold mines worldwide (excluding mining at the very small-
scale, artisanal and often ‘unofficial’ level). Today, the overall level of global mine
production is relatively stable, averaging approximately 2,485 tonnes per year over
the last five years. New mines that are being developed are serving to replace
current production, rather than to cause any significant expansion in the global
total.

The comparatively long lead times in gold production, with new mines often taking
up to 10 years to come on stream, mean mining output is relatively inelastic and
unable to react quickly to a change in price outlook. The incentives promised by a
sustained price rally, as experienced by gold over the last seven years, are not
therefore easily or rapidly translated into increased production.

Recycled gold (scrap)

Although gold mine production is relatively inelastic, recycled gold (or scrap)
ensures there is a potential source of easily traded supply when needed, and this
helps to stabilise the gold price. The value of gold means that it is economically
viable to recover it from most of its uses; at least, that is, where it is in a form that
is capable of being, if need be, extracted, then melted down, re-refined and reused.
Between 2004 and 2008, recycled gold contributed an average 28% to annual
supply flows.

Central banks

10
Central banks and supranational organisations (such as the International Monetary
Fund) currently hold just under one-fifth of global above-ground stocks of gold as
reserve assets (amounting to around 29,600 tonnes, dispersed across 110
organisations). On average, governments hold around 10% of their official reserves
as gold, although the proportion varies country-by-country.

Although a number of central banks have increased their gold reserves in the past
decade, the sector as a whole has typically been a net seller since 1989,
contributing an average of 447 tonnes to annual supply flows between 2004 and
2008. Since 1999, the bulk of these sales have been regulated by the Central Bank
Gold Agreement/CBGAs (which have stabilised sales from 15 of the world's
biggest holders of gold). Significantly, gold sales from official sector sources have
been diminishing in recent years. Net central bank sales amounted to just 246
tonnes in 2008.

Gold production

The process of producing gold can be divided into six main phases: finding the ore
body; creating access to the ore body; removing the ore by mining or breaking the
ore body; transporting the broken material from the mining face to the plants for
treatment; processing; and refining. This basic process applies to both underground
and surface operations.
11
The world's principal gold refineries are based near major mining centres, or at
major precious metals processing centres worldwide. In terms of capacity, the
largest is the Rand Refinery in Germiston, South Africa. In terms of output, the
largest is the Johnson Matthey refinery in Salt Lake City, US.

Rather than buying the gold and then selling it onto the market later, the refiner
typically takes a fee from the miner.

Once refined, the bullion bars (with a purity of 99.5% or higher) are sold to bullion
dealers who, in turn, trade with jewellery or electronics manufacturers or investors.
The role of the bullion market at the heart of the supply-demand cycle - instead of
large bilateral contracts between miner and fabricator - facilitates the free flow of
metal and underpins the free market mechanism.

Ten largest gold mining companies

1. Newmont (U.S.)
2. AngloGold Ashanti (Russia)
3. Barrick Gold (Canada)
4. Golf Fields (Russia)
5. Placer Dome (Canada)
6. Freeport McMoran (U.S.)
12
 7. Harmony (Russia)
8. Navoi Metals and Mining (Uzbekistan)
9. Buenaventura (Peru)
10.Rio Tinto (United Kingdom)

Top 10 Countries Producing gold

1 South Africa
2 Australia
3 United States
4 China
5 Peru
6 Russia
7 Indonesia
8 Canada
9 Uzbekistan
10 Papua New Guinea

13
 LITERATURE REVIEW

Dr. David Davis, (2007) has carried out research to forecast the gold price. It also
defines the drivers of the gold price. The drivers which are looked upon in this
paper are economic environment of the US economy, demand and supply and
exchange rates. Higher oil prices will likely result in inflationary pressures, which
in turn will likely result in upward pressure on the gold price because of gold’s use
as an inflation hedge. Gold price increases simultaneously with USD/EUR
exchange rate. Increased investments demands, gold consumption and diminishing
mine supply have already begun. The supply demand imbalance will lead to gold
price hike. As per the future estimation in the article the gold price will reach up to
Rs.28000 per 10gm.
Joelle Noreau and Martin Lefebvre 2006 have predicted the investor’s outlook
in the near future for investing in gold by discussing dependent variables of gold
like inflation, USD, consumer demand and production of gold. It is difficult to
anticipate investor’s intentions. In the near future gold price would certainly follow
upward trend which would be more attractive to investors.
The objective of Eric J. Levin* & Robert E. Wright, (2006) was to identify the
short run and long run determinants of gold price. These determinants are inflation
rate, USD exchange rate, gold lease rate, credit risk default premium and political
risk. Empirical analysis result shows that the prices of gold and general price level
in the USA are related. I.e. US inflation and long term price of gold. The short run
determinants are mainly supply and demand and gold lease rate. Whereas long run
determinants are inflation rate or inflation volatility, credit risk and USD exchange
rate.
Greg Tkcaz From Research Department Bank of Canada (2007) have analysed
using the data of 14 countries for which countries, if any, gold could potentially
serve as a useful indicator of Inflation. The facts and figures of inflation and gold
price relation of several countries is concluded in the result.
In Canada if gold price rises by 10%, inflation rate rises by 0.25% over next 12
months. In New Zealand 10% increase in gold price causes 1.1% increase in
inflation rate in next 24 months if the exchange rate remains the same. Rate of
return are higher for countries like New Zealand, Australia, Sweden. Countries
such as Japan and US, power of gold for inflation is much weaker. In china if gold
price increases by 10%, inflation rate goes up by 1.2% for next 12 months.
Dan diBartolomeo, (1993), investigated if the gold price dominates gold related
equity securities such as common stock in gold mining companies. In this article
descriptive method is used. CAPM model and linear regression model is used. He
concluded that Gold mining equities do not depend much on the gold price but do
get influenced due to Inflationary expectations, level of international economic and
political instability. This study also indicates that gold related equities are
considered speculative by investors and are favored in times of rising economic
confidence.
Jonathan Phair ,(2004), conducted study to show what place precious metal
has in today’s investment. This paper has shown that the role of gold changed
remarkably over the past few decades. In the 1970s, inflation was rampant and
gold and silver were highly profitable. At that time, they were some of the few
investments that could be used to hedge against extreme and unprecedented
inflationary pressure, and prices increased accordingly. In contrast, the past 20
years have been marked by low interest rates, a steadily appreciating stock market,
and stagnation in precious metals prices. There is little concern about
hyperinflation, and financial institutions that are concerned about small
inflationary pressures hedge their risks with swaps, floating rate agreements, and
forward contracts. He found that gold and silver has great potential for investors.
However it raises questions about the suitability of the metals for modern portfolio.
Significant new research will need to be conducted if investors are to be properly
informed about the potential of the metals markets.
Stephen Harmstone, (1998), wants to determine that gold functions as
long term store for value. However, during periods of occupation by a foreign
power or the collapse of a monetary system, gold’s liquidity, acceptability and
portability have been particularly important qualities and may well be more
pertinent than gold’s rate of exchange with paper money. In periods of economic
dislocation and high inflation gold has consistently proved a better wealth
preserver than other assets. In a period of a long bull run in equities, with low
inflation and relative stability in foreign exchange markets, it is tempting for
investors to expect continual high rates of return on investments. It sometimes
takes a period of falling stock prices and market turmoil to focus the mind on the
fact that it may be important to invest part of one’s portfolio in an asset that will, at
least, hold its value

The main objective of Robert B. Barsky, Lawrence H. Summers (1988) is to

explain the correlation between interest rates and gold standards. New gold
production accounted for significant share of the variation in the price level during
the nineteenth and early twentieth centuries. This paper shows that the gold price
and changes in nominal interest rates are associated but gold discoveries are also
associated with the price.
Collin Lawrence, (2003) carried out research to investigate why is gold different
from other assets. This research tested the argument that the fundamental reason
for this lack of correlation is that returns on gold are not correlated to economic
activity whereas returns on mainstream financial assets are. A number of different
relationships were examined to show that returns on gold are independent of the
business cycle. Using both static and dynamic analysis this study examined to what
extent there is a relationship between economic variables and (i) financial indices
(ii) commodities and (iii) gold. Gold is independent of economic cycle and is good
portfolio diversifier.

Paul Mylchreest, 2007 The main objective of this paper is to discuss various
aspects of gold market such as supply and demand, transparency and intervention
in the gold market and warnings by gold market. Data used is since 1970 to 2007
for gold price and oil price. He concluded that the gold price is strongly affected by
lesser supply, as the natural availability has limitations. Gold price also gets
affected due to the change in oil price.
The objective of the paper written by David Greely and Jeff Currie, 25th mar
2009 is to discuss various aspects of gold as a commodity and is there any
association between interest rate and gold price. This paper says that the gold price
drivers are exchange rate, interest rate and consumer price index. There are other
factors involve for hike in gold prices like supply and demand, monetary demand
and non monetary demand of the gold. Monetary and non monetary demand does
play a role in deciding the price of the gold. Also there is link between real interest
rate and pricing of gold as currency.
Scotiamocatta, (2010), have examined about the factors influencing gold
price and forecast the gold price for 2010. The conclusion is the gold price for the
future is likely to increase till 2010. Gold is likely to remain highly sought after as
a store of wealth and we would not be surprised to see Gold prices rise to, perhaps
significantly, new highs. There are likely to be periods of widespread risk
reduction that carry Gold prices lower too, but each dip is expected to attract strong
scale down buying from investors and fabricators. Overall, we would expect the
bulk of trading between now and the end of 2010 to be within the $850/oz to
$1,400/oz range.

Ronald peter stoeferley, June 2008 carried out studies to discuss about the
various determinants of the gold price. He examined that the gold price for the
future is likely to affect due to various determinants like oil price, inflation,
exchange rate and supply and demand. Commodities will become more important
as asset class within the framework of strategic asset allocation over the next
couple of years among private investors as well due to the aforementioned
characteristics. The gold price will be supported by a range of additional factors.
The credit crisis is not over yet, and the US macroeconomic data are ambivalent.
The problems on the US housing markets are actually getting worse. Because of
the latest crisis people seem to remember the actual benefits of gold the
demonetarization of gold has begun.
Rhona O’Connell, (2007), investigates about opportunities that lie in the local
gold market. His investigation concludes that the gold market in India may be an
old one, but it has considerable scope for growth. The recent changes in the
regulatory environment should be a major help in stimulating fresh products and
new demand; indeed some of the top mutual funds, along with the World Gold
Council offices in India, are working closely with the regulators to introduce a gold
fund into the Indian markets.

Z. Ismail, A. Yahya and A. Shabri (2009) have carried research to forecasting

model for predicting gold price using linear regression model. Two models
were considered. The first model considered all possible independent variables.
The model appeared to be useful for predicting the price of gold with 85.2% of
sample variations in monthly gold prices explained by the model. The second
model considered the following four independent variables the (CRB lagged one),
(EUROUSD lagged one), (INF lagged two) and (M1 lagged two) to be significant.
In terms of prediction, the second model achieved high level of predictive
accuracy. The amount of variance explained was about 70% and the regression
coefficients also provide a means of assessing the relative importance of individual
variables in the overall prediction of gold price.

REGRESSION RESEARCH METHOD

Regression Definition:
A regression is a statistical analysis assessing the association between two
variables. It is used to find the relationship between two variables.

Regression Formula:
Regression Equation(y) = a + bx
Slope (b) = (NΣXY - (ΣX)(ΣY)) / (NΣX2 - (ΣX)2)
Intercept(a) = (ΣY - b(ΣX)) / N

where
x and y are the variables.
b = The slope of the regression line
a = The intercept point of the regression line on the y axis.
N = Number of values or elements
X = First Score
Y = Second Score
ΣXY = Sum of the product of first and Second Scores
ΣX = Sum of First Scores
ΣY = Sum of Second Scores
ΣX2 = Sum of square First Scores

Correlation is a measure of association between two variables. The two most

popular correlation coefficients are: Spearman's correlation coefficient rho and
Pearson's product-moment correlation coefficient.

When calculating a correlation coefficient for ordinal data, select Spearman's

technique. For interval or ratio-type data, use Pearson's technique. The quantity r,
called the linear correlation coefficient, measures the strength and the direction of
a linear relationship between two variables.
The mathematical formula for computing r is:

where n is the number of pairs of data.

The coefficient of determination, r 2, is useful because it gives the proportion of the
variance (fluctuation) of one variable that is predictable from the other variable.
The coefficient of determination is such that 0 < r 2 < 1, and denotes the strength
of the linear association between x and y.

The value of a correlation coefficient can vary from minus one to plus one. A
minus one indicates a perfect negative correlation, while a plus one indicates a
perfect positive correlation. A correlation of zero means there is no relationship
between the two variables. When there is a negative correlation between two
variables, as the value of one variable increases, the value of the other variable
decreases, and vise versa. In other words, for a negative correlation, the variables
work opposite each other. When there is a positive correlation between two
variables, as the value of one variable increases, the value of the other variable also
increases. The variables move together.

The standard error of a correlation coefficient is used to determine the confidence

intervals around a true correlation of zero. If correlation coefficient falls outside of
this range, then it is significantly different than zero.

(Ln) function is used to determine annual percentage growth in excel.

Examination of economic factors

Examination of economic factors and Interpretation

(1) BSE SENSITIVE INDEX OR SENSEX

SENSEX is not only scientifically designed but also based on globally accepted
construction and review methodology. First compiled in 1986, SENSEX is a basket
of 30 constituent stocks representing a sample of large, liquid and representative
companies.
The index comprises of 30 scrip’s whose weighted averages are taken The new
scrips are :
State Bank of India , Mahanagar Telephone Nigam Limited, TELCO , Hindustan
Lever , SAIL, Reliance , IDBI , Bajaj Auto , ITC , HPCL , TISCO , L & T ,
Hindalco, BHEL, Tata Chemical , Mahindra & Mahindra , Indian Hotels ,
Colgate-Palmolive , IPCI, Grasim , ACC, Ranbaxy, ICICI, Nestle India , BSES ,
Gujarat Ambuja Cement , Tata Power , Glaxo India, G.E. Shipping and Arvind
Mills .
The base year of SENSEX is 1978-79 and the base value is 100. The index is
widely reported in both domestic and international markets through print as well as
electronic media.
The Index was initially calculated based on the "Full Market Capitalization"
methodology but was shifted to the free-float methodology with effect from
September 1,2003. The "Free-float Market Capitalization" methodology of index
construction is regarded as an industry best practice globally. All major index
providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float
methodology.
Due to its wide acceptance amongst the Indian investors; SENSEX is regarded to
be the pulse of the Indian stock market. As the oldest index in the country, it
provides the time series data over a fairly long period of time (From 1979
onwards). Small wonder, the SENSEX has over the years become one of the most
prominent brands in the country.
The growth of equity markets in India has been phenomenal in the decade gone by.
Right from early nineties the stock market witnessed heightened activity in terms
of various bull and bear runs. The SENSEX captured all these events in the most
judicial manner. One can identify the booms and busts of the Indian stock market
through SENSEX.
DATA INTERPRETATION FOR SENSEX
Hypothesis:-
Alternate Hypothesis - The gold price varies with the changes that occur in
sensex.
Null Hypothesis – The gold price do not vary with sensex.
Result: -
Multiple R is 0.8679 and R square is 0.75321.
The regression equation is Y= 4.6907+0.59X
P value is less than 0.05 hence it is significant.
The association between the Sensex and gold price is 75.32%.
When the correlation between the Sensex and Gold is examined the correlation
found between the two is positive.
Alternate hypothesis is accepted and null hypothesis is rejected.
Since gold is an important saving instrument in India and is very often used as a
hedge against inflation, it is expected that gold may be looked upon as alternative
asset for those holding idle money, for speculative purposes.
Even though gold is considered to be the best alternative source of investment
investor’s have tendency to switch to gold investment when they find the market to
be too risky.

(2) CRUDE OIL

Crude oil is one of the most basic global commodities. Fluctuation in the crude oil
prices has both direct and indirect impact on the global economy.

Therefore, the prices of crude oil are tracked very closely by investors the world
over. Crude oil prices have gone up to record levels of USD 125 per bbl (rise of
around 70 percent from previous year's levels).

The price variation in crude oil impacts the sentiments and hence the volatility in
stock markets all over the world. The rise in crude oil prices is not good for the
global economy. Price rise in crude oil virtually impacts industries and businesses
across the board. Higher crude oil prices mean higher energy prices, which can
cause a ripple effect on virtually all business aspects that are dependent on energy
(directly or indirectly).

There are many factors that influence the global crude oil prices including
technology to increase production, storage of crude oil by richer nations (one major
indicator that is tracked closely is the US crude oil inventory data), changes in tax
policy, political issues etc. In the recent past, we have seen many factors
influencing the prices of global crude oil.

IMPORTANT FACTORS THAT INFLUENCE CRUDE OIL PRICES

GLOBALLY:

Production

A large part of the world's crude oil share is produced by OPEC (Organisation of
Petroleum Exporting Countries) nations. Any decisions made by OPEC countries
to raise the prices or reduce production, immediately impacts the prices of crude
oil in the global commodity markets.

Natural causes

In the recent past, there were many events driving volatility in the crude oil prices.
Events like a hurricane hitting the oil producing areas in the US have driven the
crude oil prices in global markets.

Inventory

Oil producers and consumers build a storage capacity to store crude oil for
immediate future needs. They also build some inventories to speculate on the price
expectations and sale/arbitrage opportunities in case of any unexpected changes in
supply and demand equations. Any change in these inventory levels triggers
volatility in crude oil's prices which in turn creates ripples in the stock markets.

Demand

The demand of crude oil is raising sharply due to high growth and demand from
the emerging economies. On the supply side, the major sources of supplies are still
the same as they were in the last decade. This is another factor that is influencing
the prices of crude oil upwards.

Crude oil inventories have demonstrated a highly cyclical pattern in the recent past.
Usually, crude oil inventories increase in the summer months and decrease in the
winter months. This is because cold temperatures in the winter increase the use of
energy for heating in many cold countries. The demand for fuel goes above supply
and results in a need to tap inventories.

Likewise, during warm summer months, supply generally exceeds demand and
petroleum inventories build up. Hence, the crude oil prices drop. Crude inventory
levels provide a good signal of the price direction. India imports more than 80
percent of crude requirements from oil producing countries and therefore
fluctuations in oil prices are being tracked more closely in the domestic markets.

Prices of essential commodities like crude are also one of the prime drivers of
inflation in the global economy. As we get more globalised, domestic firms and
investors need to understand the world economy and financial markets well, in
order to respond to the new realities of India as an open economy better.

DATA INTERPRETATION FOR OIL

Hypothesis

Alternate Hypothesis: - Gold price moves with the oil price.

Null Hypothesis: - Gold price do not moves with oil price.

Result: -

Multiple R is .9080 and R squared is 0.8246.

Regression equation: Y=2.89+0.676x

The strength between the oil price and gold price is about 82.46%. P value is less
than 0.05 hence result is significant.

As per the correlation drawn there is strong positive correlation between oil and
gold. I.e. when oil price shows increase the gold price increases simultaneously.
Hence null hypothesis is rejected and alternate hypothesis is accepted.

Changes in the oil price do, however, have an important effect on gold mining
shares, but it's not the effect that most people would expect. To be specific, as far
as gold mining equities are concerned a rise in the oil price is BEARISH and a fall
in the oil price is BULLISH. The reason, of course, is that gold miners are major
CONSUMERS of oil (a large chunk of a gold miner's costs are energy-related).

The only reason the two markets have similar long-term trends is that they have
one important long-term driver in common: monetary inflation. There is, however,
an inverse relationship between the oil price and the prices of gold shares, but this
relationship only comes to the fore during periods when the oil price is moving
sharply lower or sharply higher relative to the gold price.

(3) INTEREST RATE

The Prime Interest Rate is the interest rate charged by banks to their most
creditworthy customers (usually the most prominent and stable business
customers). The rate is almost always the same amongst major banks. Adjustments
to the prime rate are made by banks at the same time; although, the prime rate does
not adjust on any regular basis. The Prime Rate is usually adjusted at the same
time and in correlation to the adjustments of the Fed Funds Rate.

There are certain indicators which help in predicting the future of an economy
much in advance. These indicators are called as leading indicators. The name itself
suggests that the prediction leads and later the economy are seen to prove the
prediction right. Some of these indicators in the recent scenario are inflation,
deflation and prices of various commodities.

One of the important indicators is interest rates. A gradual rise in interest rates
indicates that the economy is growing. This is because interest rates actually
indicate demand for money; an increase in demand for money is good for the
economy. More the demand for money indicates increasing consumption. But a
rapid rise in interest rates indicates a rapid increase in the demand for money
which means there is a rise in speculative activity in the economy, demand for
noncore goods and this may be inflationary for the economy. That is why it is often
said that gradual growth is important rather than immediate growth. During 2006
we saw interest rates rising steadily which indicated economy growing gradually
which was good. But from Mid 2007 and early 2008 interest rates rose very rapidly
which indicated an overheated economy with mounting inflationary pressures.
Now India is witnessing a slowdown in interest rates which indicates, economy
slowing down due to an abnormal overheating in 2008 and government trying to
stabilize the economy.

DATA INTERPRETATION FOR INTEREST RATE

Hypothesis: -
Alternate hypothesis: - The gold price varies with interest rate.

Null Hypothesis: - Gold price do not fluctuate with respect to the interest rate.
The correlation measured between the interest rate and gold price shows positive
correlation for the last 10 years.

Result: -
Multiple R is 0.354 and R squared is 0.125.
Regression equation is Y=8.6380-0.4661x
P value is less than 0.05 hence the regression is significant. The strength between
the interest rate and gold is 12.5%.
Alternate hypothesis is accepted and null hypothesis is rejected.
However this correlation is not strong if compared to the trend of last 100 years (as
per research paper study).
Interest rate is more when the economic condition is stable. If interest rate is lower
money gets easily available. If investor invests his money he would not get the
high returns. In such scenario Gold is good option due to its store value

Whenever interest rates fall, gold prices increase. Lowering interest rates increases
gold prices as gold becomes a better investment option vis-a-vis debt products that
earn lower interest. Gold loses its shine in a rising interest rate scenario.

(4) EXCHANGE RATE

The rate at which one currency is converted into another currency is the rate of
exchange between the currencies concerned.
The rate of exchange for a currency is known from the quotation in the foreign
exchange market. The banks operating at a financial centre, and dealing in foreign
exchange, constitute the foreign exchange market. As in any commodity or stock
market, the rates in the foreign exchange market are determined by the interaction
of the forces of demand for and supply of the commodity dealt in, viz., foreign
exchange. Since the demand and supply are affected by the number of factors, both
fundamental and transitory, the rates keep on changing frequently, and violently
too.

DATA INTERPRETATION FOR EXCHANGE RATE

Hypothesis:-
Alternate Hypothesis: - Gold price fluctuates with the increase or decrease in the
Exchange rate.
Null Hypothesis: - Gold price do not fluctuate with the exchange rate.
Correlation is measured by using annual data of exchange rate of USD vs. INR
Multiple R is 0.2370 and R squared is 0.05619.
Regression equation is 18.024-2.1095x. P value is less than 0.05 hence the result is
significant.
Exchange rate and gold are related at 5.69%.It shows weak correlation. This
indicates that if rupee price depreciates the gold price appreciates.
Result: - Alternate hypothesis is accepted and null hypothesis is rejected.
When the dollar appreciates it takes more dollars to buy the gold. Gold is imported
from the foreign country and US dollar is standard currency for trades occurring
internationally. Hence as the dollar price increases or rupee depreciates, gold price
increases simultaneously.

(5) INFLATION

In economics, inflation is a rise in the general level of prices of goods and services
in an economy over a period of time. When the price level rises, each unit of
currency buys fewer goods and services; consequently, inflation is also erosion in
the purchasing power of money – a loss of real value in the internal medium of
exchange and unit of account in the economy. A chief measure of price inflation is
the inflation rate, the annualized percentage change in a general price index
(normally the Consumer Price Index) over time.

Inflation can have many effects that can simultaneously have positive and negative
effects on an economy.

Inflation is caused due to several economic factors:

• When the government of a country print money in excess, prices increase to
keep up with the increase in currency, leading to inflation.
• Increase in production and labor costs, have a direct impact on the price of
the final product, resulting in inflation.
• When countries borrow money, they have to cope with the interest burden.
This interest burden results in inflation.
• High taxes on consumer products, can also lead to inflation.
• Demands pull inflation, wherein the economy demands more goods and
services than what is produced.
• Cost push inflation or supply shock inflation, wherein non availability of a
commodity would lead to increase in prices.

The problems due to inflation would be:

• When the balance between supply and demand goes out of control,
consumers could change their buying habits, forcing manufacturers to cut down
production.
• The mortgage crisis of 2007 in USA could best illustrate the ill effects of
inflation. Housing prices increases substantially from 2002 onwards, resulting in a
dramatic decrease in demand.
• Inflation can create major problems in the economy. Price increase can
worsen the poverty affecting low income household,
• Inflation creates economic uncertainty and is a dampener to the investment
climate slowing growth and finally it reduce savings and thereby consumption.
• The producers would not be able to control the cost of raw material and
labor and hence the price of the final product. This could result in less profit or in
some extreme case no profit, forcing them out of business.
• Manufacturers would not have an incentive to invest in new equipment and
new technology.
• Uncertainty would force people to withdraw money from the bank and
convert it into product with long lasting value like gold, artifacts.

DATA INTERPRETATION FOR INFLATION

Hypothesis: -
Alternate Hypothesis: - Gold price varies with Inflation rate.
Null Hypothesis: - Gold price do not vary with inflation rate.
Multiple R is0.9441 and R squared is 0.89145.
Regression equation is 7.89+2.128x
P value is less than 0.05 hence the result is significant.
This shows that inflation and gold have 89.14% of relationship. There is a strong
positive correlation between the inflation rate and the gold price. When annual
inflation rate is examined with gold price it is observed that inflation rate and gold
price rises together.
Result: - Alternate hypothesis is accepted while the null hypothesis is rejected.
"Millions of people all over the world regard gold as 'money,' if not the only 'true'
money." As a consequence, the price of gold commands attention, and rightly so,
because it serves to indicate general price stability or inflation. But gold is also a
commodity, used in jewelry and by industry. This means that the details of its
demand and supply affect its pricing, and need to be considered when gold is used
to assay monetary policy.

CONCLUSION

Gold as one of the precious metal accepted worldwide for its multipurpose use.
The usage can be for jewellery, investment, hedging or in industrial sector. Gold
has its own power and stands apart from rest of the metals. As seen above the
various factor which influences gold price are inflation, interest rate and exchange
rate. Where as the factor which varies with the gold is oil price. Sensex shows
relation with gold price variation but do not explain any specific reason.
During the research it was found that all these factors mentioned above are not
only related with gold but they are also interrelated with each other. Overall it
concludes that these are the factors which represent the India’s economy and hence
affects the gold price to the large extent.
If we consider the trend in the last 9 years i.e. since Jan 2000 till 2009 gold price
will continue to rise in the future ahead. The trend also says that the last quarter of
the year is the period when gold price increases in India primarily due to festive
seasons. Once the prices move upwards they do not move at lower level.
Gold price moves downwards sometime but only for a month or so.
I.e. the gold is only such asset which will give an investor a positive return, may be
at low rate but investment is safe haven.
The point to note is that gold’s price elasticity is negative. What this means is that
higher the price of gold, higher is the demand for gold. This is a unique feature of
gold, as any other commodity whose prices go up sees lowering of demand. But
with gold, it is when prices raise the most that the demand is the highest, pushing
up prices further. In the year 2007, gold prices went up by nearly 20 per cent
compared to prices in 2006; however demand for gold went up by nearly 5 per
cent. When people see price going up, they normally tend to consume less of the
good, including essential items like oil and petrol. But in the case of petrol, rising
prices signal the possibility of higher returns and therefore more people like to buy
gold. What happens is that gold prices in real terms come down once there is some
buoyancy in the capital market and when mining activities across the world resume
their production. However the nominal price always stays above the previous price,
therefore gold is never seen as a risky investment even though for several years it
might have remained a really low return investment compared to real estate, the
share market and the money market.
As the gold price is getting higher day by day demand has also increased from the
investor. Thus Gold is the superior among all the types of investment option
available.
 BIBILIOGRAPHY

Books:
Foreign Exchange by C. Jeevanandam
Management Research Methodology by K. N. Krishnaswamy, Appa Iyer
Sivakumar, M. Mathirajan

Websites:
www.wikipedia.org
www.gold.org
www.rbi.org
www.kitco.com
www.financemanual.com
www.x-rates.com
www.tradingeconomics.com
www.oil-price.org
Research papers by:
• Dr. David Davis, (2007), “The future of Gold Price: Forecast Gold”
Credit Suisee Securities Report

• Joëlle Noreau and Martin Lefebvre, (2006), “What’s the frenzy

surrounding gold price?” Economic viewpoint Desjardins economic
studies.

• Eric J. Levin* & Robert E. Wright, (2006), “Short-run and Long-run

Determinants of the Price of Gold” World gold council research
study no. 32

• Greg Tckaz, (2007), “Gold prices and inflation” , Bank of Canada

working paper no.35

• Dan dibartolomeo, (1993), “Behavior of Gold Mining Equities: Gold

Prices and Other Influences” Report by Northfield information
services.

• Jonathan Phair ,(2004), “Gold and silver: The changing role of

precious metal”, Washington university

• Stephen Harmstone, (1998), “Gold as a store of Value”, World gold

council, Research study no.22

• Robert B. Barsky, Lawrence H. Summers (1988) “Gibson’s Paradox

and the gold standards” The journal of political economy, Volume 96

• Collin Lawrence, (2003), “ Why is gold different from other assets?

An empirical investigation” Report by World gold council

• Paul Mylchreest, (2007), “Gold wargold is Money and Nothing

Else”, Redburn Research paper
• David Greely and Jeff Currie, (2009),”Forecasting Gold as
commodity”, Goldman Sachs Global Economics, Commodities and
Research, paper no. 183

• Scotiamocatta, (2010), “Special Metal Forecast 2010” research report

by Bank of Nova scotia, Canada

• Ronald peter stoeferley , (2008), “Special Report on Gold: Shiny

Outlook”, Report by Erst Bank

• Rhona o’conell, (2007), “ Exciting Advances in the Local Gold

Market” World gold council

• Z. Ismail, A. Yahya and A. Shabri (2009), “Forecasting Gold prices

using multiple linear regression method”, American Journal of
Applied Sciences 6 (8): pp 1509-1514,
 APPENDIX
While using regression method the variables data since the year 2000 till the year
2009 is considered. The regression is calculated by using excel 2007. The outputs
shown by excel are as follows.

Sensex vs. Gold

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.8678742
R Square 0.7532057
Adjusted R Square 0.7223564
Standard Error 0.2387299
Observations 10

ANOVA
Significance
df SS MS F F
24.41565
Regression 1 1.39149609 1.3915 4 0.00113332
0.0569
Residual 8 0.45593571 9
Total 9 1.8474318
 Coefficient Standard L
s Error t Stat P-value Lower 95% Upper 95% 9
4.3761 0.002360 7.1625553
Intercept 4.6907819 1.07188597 9 8 2.21900839 5 2.
4.9412 0.001133 0.8657082
X Variable 1 0.5902474 0.11945377 2 3 0.31478647 7 0.

Oil Vs. Gold

SUMMARY OUTPUT

Regression Statistics
0.90808874
Multiple R 9
0.82462517
R Square 6
0.80270332
Adjusted R Square 4
0.20758610
Standard Error 8
Observations 10

ANOVA
Significance
df SS MS F F
1.62097
Regression 1 1.62097346 3 37.6165819 0.000279
0.04309
Residual 8 0.344735939 2
Total 9 1.965709399

Standard
Coefficients Error t Stat P-value Lower 95% Upper 95
2.89322785 5.39520 0.00064972 4.129843
Intercept 9 0.536259084 5 5 1.656612
0.87696751 6.13323 0.00027908 1.206694
X Variable 1 4 0.142986107 6 1 0.547241
PLR vs. Gold
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.354309277
R Square 0.125535064
Adjusted R Square 0.016226947
Standard Error 0.449376559
Observations 10

ANOVA
Significance
df SS MS F F
1.14845143
Regression 1 0.231917469 0.231917469 3 0.315135197
Residual 8 1.615514331 0.201939291
Total 9 1.8474318

Standard
Coefficients Error t Stat P-value Lower 95% Upp
0.00012649 11.5
Intercept 8.638073749 1.254720493 6.884460559 8 5.744683105
- - 0.31513519 0.53
X Variable 1 0.466143383 0.434973908 1.071658263 7 -1.469195012

Exchange Rate vs. Gold

SUMMARY OUTPUT
 Regression Statistics
Multiple R 0.237061057
R Square 0.056197945
-
Adjusted R Square 0.061777312
Standard Error 0.466852483
Observations 10

ANOVA
Significance
df SS MS F F
0.47635365
Regression 1 0.10382187 0.10382187 5 0.50960206
Residual 8 1.74360993 0.217951241
Total 9 1.8474318

Standard Up
Coefficients Error t Stat P-value Lower 95% 9
0.16089412
Intercept 18.02469502 11.6654235 1.545138504 5 -8.875819791 44
-
X Variable 1 -2.10959538 3.056570483 0.690183783 0.50960206 -9.158059547 4.9

Inflation vs. Gold

SUMMARY OUTPUT

Regression Statistics
0.94417036
Multiple R 7
0.89145768
R Square 2
0.87788989
Adjusted R Square 3
Standard Error 0.15832108
 6
Observations 10

ANOVA
Significance
df SS MS F F
1.6469072
Regression 1 1.646907271 7 65.7039726 3.97E-05
0.0250655
Residual 8 0.200524529 7
Total 9 1.8474318

Standard Upper
Coefficients Error t Stat P-value Lower 95% 95%
7.88797263
Intercept 4 0.262181219 30.085956 1.62E-09 7.283382 8.492564
1.28462617
X Variable 1 3 0.158482368 8.1057987 3.97228E-05 0.919165 1.650087