Study of Select Factors On Price of Gold

International Finance
Group Assignment
A Study on relationship between Currency Fluctuations and Gold

Prices in USA and India and Understanding the Factors Affecting
International Price of Gold
Submitted To:
Prof. Dhiren Jotwani
Submitted By:
Aayushi Ostwal (147101)
Esha Raste (147112)
Prakriti Dutta (147131)
Institute of Management, Nirma University

Date of submission: 11th March, 2019
IMBA – 2014-19
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ACKNOWLEDGEMENT
We would like to acknowledge a few people who have helped us come up with this research on
“A Study on relationship between Currency Fluctuations and Gold Prices in USA and India and
Understanding the Factors Affecting Price of Gold”.
We would like to take this opportunity to express my profound gratitude and deep regard to Prof.
Dhiren Jotwani, for his exemplary guidance, valuable feedback and constant encouragement
throughout the duration of the project. His valuable suggestions were of immense help throughout
our research work. His perceptive criticism kept us working to make this project in a much better
way. Working under his was an extremely knowledgeable experience for us.
We would also like to thank the respondents as without their cooperation the research would not
have been possible.
Thank You.
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TABLE OF CONTENTS
Sr. No. Topic Page No.

1. Research Title 4
2. Abstract 4
3. Introduction 5
4. Literature Review 6
5. Research Methodology 12
6. Data Analysis and Findings 13
7. References
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RESEARCH TITLE
A Study on relationship between Currency Fluctuations and Gold Prices in USA and India and
Understanding the Factors Affecting International Price of Gold
INTRODUCTION
Our main aim is to study the relationship of US Dollar fluctuations with gold prices, Indian rupee
fluctuations with gold prices and to understand the three factors i.e. Oil Price, US Inflation Rate,
US Interest Rate that affects and influence the prices of Gold.
For the purpose of the study, we have chosen the following variables:
1. Gold Price
2. US Dollar
3. Indian rupee
4. Oil Price
5. US Inflation Rate
6. US Interest Rate
We have chosen US dollar as the variable because the prices of gold is highly influences by the
US dollar as it is dollar denominated. US dollar is a strong influencer. When US dollar falls, prices
of gold rise as the value of other currencies all over the world rises when US dollar falls. Then,
India is chosen because it is the fifth largest gold importer in world. The main factors that affect
gold prices are Crude Oil, Inflation Rate of US and Interest Rate of US. Oil prices is an essential
factor in determining price of Gold as well as Gold exchange traded funds. Similar to gold, prices
of oil are in US dollars. When there is appreciation in dollar, the assets which are denominated in
dollars usually decrease, as the assets denominated in dollars seems more costly in different
currencies to the investors. As both gold and crude oil are dollars-denominated assets, they are
closely related. Inflation rate also affects gold prices. When there is an increase in the inflation
rates, the currency depreciates and that is why investors keep more money in terms of gold. So,
when for a long period of time the inflation is on hike, investors use gold as a medium to hedge
against rising inflation. Hence, this leads to a rise in the prices of gold during inflation period.
There exists a negative correlation among gold and interest rates as per few experts under normal
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conditions. In general, the real interest rate and prices of gold have a negative correlation, so, the
rise in interest rates has an adverse effect on gold. We can say that the increasing interest rates
leads to increase in the opportunity cost of keeping the assets which do not give any interest (for
example metals) as it makes these metals very unattractive to invest in. Gold does not pay
dividends or pay interest. Therefore, when the real interest rate is high, it becomes costly to keep
it in your portfolio, and when the interest rates goes down, it is relatively cheap.
LITERATURE REVIEW
Research Paper 1: “A study on impact of select factors on the price of Gold”
The factors that are the key reasons behind fluctuations in price of gold are mentioned below:
• US Dollar
• Crude oil Price
• Repo Rates
• Inflation Rates
(1) US DOLLAR
This is an important matter of study to understand whether there exists a correlation between gold
price and dollar exchange rate. We will be able to judge that on the basis of situational changes in
the global economic changes. Currently, there is an inverse relationship between the value of dollar
and price of gold. However, before the 1950s, the dollar was preferred as an inflation hedge, which
has changed now. Hence, in the past there would have been a positive relationship between gold
price and dollar. But in today’s date the relationship stands negative. USA has large amount of
debt and its interest is higher than income, due to which there has been a downward pressure on
the dollar and over the years, it has grown weak. This has also created an inverse relationship.
When the international gold prices fall, investors outside the USA get a benefit as the dollar price
of gold rises. Investors will start shifting their assets denominated in dollars to gold. Past data is
also a proof that gold acts a hedge for currency.
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(2) CRUDE OIL PRICES
Crude oil is an important driver of inflation across the globe. As the prices of crude rise, the
economy starts to get weakened and inflation gets an upward push. So in order to hedge for the
rising inflation, people park their money in safe assets like gold. Hence, it can be very well stated
that there is a relationship between prices of the yellow gold and the black gold. Gold has been
one of the most sought-after investment avenue for ages and remains the king of all currencies.
Banknotes may lose their purchasing power over time, but gold does not. The demand for crude
will also remain unshaken in the near future. Hence, at times of inflation, when currencies lose
their value, more purchase of gold happens because of its stable purchasing power. Therefore,
during the high crude oil prices, high inflation and stock market declines, gold can be stored to
hedge inflation. So it can be said that the price of oil does have a serious impact on the price of
gold. It is important to know that this has a big impact on the current economic situation.
(3) REPO RATE:
The repo rate is the ratio of commercial banks borrowing money from Federal Reserve. This is
one of the main approaches to control inflation. When the repo rate is high, the borrowing from
the bank will be very low. In fact, it will reduce the purchasing power of the public. This will
reduce investment in gold and ultimately reduce the price of gold.
(4) INFLATION RATE:
Gold has always been considered a good hedge against inflation. Traditional theory implies the
relative price of consumer goods and assets such as land and gold should not be permanently
affected by inflation rates. In equilibrium, inflation should cause equal changes in the inflation rate
of each asset price. There are two inflation rates for calculating gold prices. Firstly, it is the internal
inflation rate of gold, which is a change in its production that comes from the mines. The second
is currency inflation. The medium and long-term gold price is determined by the inflation rate
relative to the currency you want to measure. In most Fiat currency inflation rate, the operating
rate is much higher than the inflation rate of gold, so it is easy to see why the price of gold has
risen and will continue to increase over time and why it will increase over time. This will not
change regardless of short-term fluctuations.
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Research Paper 2: “Oil, Gold, US dollar and Stock market interdependencies: A global
analytical insight”
This paper examines the relationship between oil, gold, the dollar, and stock prices from a global
perspective and identifies the interactions between the parties.
• Oil price versus gold price
International oil and gold prices have become common features, especially when talking about the
financialization process of their transactions. Both commodity markets are often affected by
common aspects such as US dollar, economic factors and geopolitical events. Gold is often seen
as an alternative currency and a safe haven for risk avoiding investors. Although advanced
economies have improved energy efficiency and reduced inflation risks, oil can also be used as an
inflation hedge for asset portfolios because it is an important driver of inflation. Oil and gold are
likely to rise as the dollar depreciates, but the relationship between them is not so simple, because
oil is considered a risky asset, and gold is the opposite. During the trade risk period, oil will be
purchased and gold is more likely to be sold, so there is a negative correlation between them.
Both oil and gold transactions are invoiced in US dollars. Therefore, their pricing process depends
on the strength of the currency, depending on its inflation rate. Therefore, sharing similar trends is
not because one influences another, but because their prices are driven by a common factor: the
inflation rate in the United States.
• US dollar versus Gold price
First, the depreciation of the dollar will increase the value of other countries’ currencies, thereby
increasing demand for assets including gold. Second, when the dollar begins to lose its value -
compared to its trading partners - investors look for other sources of investment to store value.
Gold is that option. This means there is an inverse correlation. However, it is important to
understand that the dollar and gold prices may rise at the same time. This can happen in times of
crisis in other countries or regions. This will cause investors to flock to safer assets - the dollar and
gold.
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Research Paper 3: “Co-integrating Relation between Exchange Rate and Gold Price”
The research paper talks about the relationship among the prices of gold and exchange rate of
India. Annual data of gold prices and the exchange rate is taken into consideration from the period
1970 till 2015 for the analysis. The tools used for the analysis purpose to find out the long term
relationship between the factors are:
• Unit root test
• Vector error correction model
• Johansen co-integration test and
• Granger causality test.
The results of the paper says that there exists a long run relation among prices of gold and INR
(exchange rate in India). So, fluctuations in the prices of gold can be stabilized by having control
on exchange rate movements. In the same way, it also shows that from one of the test i.e. Granger
causality test that the time series data which is used for one factor can’t be used to predict another.
Research Paper 4: “An Empirical Investigation of the Causal Relationship between Gold
Price, Exchange Rate and Crude Oil”
Gold prices are mainly impacted by variables like exchange rate and oil. The research paper aims
to study the relation among the three variables i.e.
• Price of Gold
• Crude Oil and
• Exchange rate.
The time period chosen for the study is from 2009 till 2013. The tools used for the analysis are
causality test and co-integration and it is performed on daily data. The findings from the analysis
was that currency or exchange rate has a positive correlation among crude oil prices and prices of
gold. When the currency appreciates, there is an increase in the prices of gold and crude oil, and
hence they move in the same direction. Money will lead to increase the prices of gold, which in
turn is reflected in crude oil prices. The regression model can be fitted by the residual test, and one
of the test which is called the Jaquera-Bera test proves that the residuals of the sample are
distributed normally. Therefore, the currency has an impact on prices of crude oil and prices of
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gold. So, it can be concluded that rise in the currency tends to rise the crude oil prices and prices
of gold.
Research Paper 5: “Linkage between Gold and Crude Oil Spot Markets in India-A
Cointegration and Causality Analysis”
India is the biggest importer of crude oil land gold. It is expected that hike in the crude oil prices
will increase the inflation rate and gold is used by the investors to do hedging against inflation, so
the authors expects some linkage among gold prices and prices of crude oil. The paper aims to
study the link among the gold and crude oil prices and the tools used for this purpose are causality
test and cointegration. The period taken into account is from 2012 till 2016. The findings from the
research are that there exists a low +ve correlation among price of gold and prices of crude oil.
From the cointegration results, it was found that there is no long term parity among the price of
both crude oil as well as gold. But as per causality test, it was found that gold prices lead the prices
of crude oil and keep up the long term causality.
Research Paper 6 - 'Gold as an Inflation Hedge?'
The intrinsic value of gold makes it an effective asset for hedging to protect from the risk of
inflation. The papers studies how hedging with the use of gold help in shoert run and long run. In
the long run, if the price of gold rises above the general rate of inflation, only then gold will prove
to be a hedge against inflation. Data Analysis tools like regression and cointegration on data from
1976 to 1999 is done on independent variables like nominal USA dollar price of gold, USA price
index, world price index, world income, beta and dollar/world exchange rate for long run and
factors such as gold lease rate, the real interest rate, convenience yield, default risk, the covariance
of gold returns with other assets and the dollar/world currencies exchange rate for short run.
Research Paper 7: “A Study on Currency Fluctuations Impact on Gold Price Determination

in Selected Countries”
Investors formulate their investment strategies in such a way so as to increase the risk-adjusted
returns and create diversification in their portfolio so as to mitigate risk. However, the benefits of
investing in gold sets it apart from other investments. It is not only an ideal source of
diversification in portfolio by introducing a different asset class, but also provides a basis for
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investors to rely on mitigating risk and more effectively protecting their corpus, especially during
times of financial turmoil, where stability is most needed. Gold in other currencies closely matches
the overall trend of the currency. By multiplying the dollar gold price by the currency's exchange
rate, the price of any other currency can be easily calculated. Inflated currencies usually affect the
price of gold; for example, if the dollar is facing inflation, which means that purchasing power is
falling, then the price of gold will rise. Gold prices are always quoted in US dollars because this
currency has become the world's reserve currency. There are two main reasons for this rise in
reserve currencies - one is convertible into gold, and the other is that since the United States has
the world's largest economy, the dollar needs to settle international transactions.
Research Paper 8 – “Gold and Inflation(s) − A Time-Varying Relationship”

This paper studies the relationship between gold and inflation in USA, UK and Japan. In UK and
USA, Gold serves as protection against inflation but to do so in Japan in long run. But in short run,
gold proves to be of no value in any country as it no more protects from inflation. All these findings
holds true only in the time of deflationary periods and turmoil.
Research Paper 9– “Gold Price and Inflation”
In order to study how gold price can be used to forecast inflation targets, 14 countries were studied
from1994 to 2005. As inflation increases, perceived purchasing power of money reduces, s in order
to protect them from such price rise people divest their money in other avenues and increase
holding of gold. This would lead to increase in the demand for gold which would lead to rise in
price of gold price. Hence, higher gold prices signals higher future inflation rate. This finding hold
true for most OECD countries. But, in Canada other factors like money, output gap, oil price also
affect inflation.
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RESEARCH METHODOLOGY
A secondary research has been conducted for the purpose of study. For the purpose of the study
we have taken the period from Jan 2009 to Dec 2018. To study the relationship between currency
fluctuations and gold prices in USA and India, we have collected data about daily international
Gold Price in dollars per Ounce, daily exchange Rates of Dollar in Indian Rupees, Chinese Yuan
in Indian Rupees and Chinese Yuan in Dollars. To understand the factors affecting International
gold price, we have collected the monthly data of International gold prices in dollars per ounce,
US Interest Rate, US Inflation Rate and Crude Oil Prices in dollars. To collect the above data, we
have used Federal Reserve, RBI and World Gold Council.
To analyze the above data, we have conducted Correlation and Regression to study relationship
between Currency Fluctuations and Gold Prices in USA and India and to extent to which other
factors affect International gold prices.
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DATA ANALYSIS AND FINDINGS
Relationship between Exchange Rates and International Gold Price

We have studied how each exchange rate individually and collectively impact the international
gold price and vice versa.
1. Effect of change in Chinese Yuan (CNY) in Indian Rupees (INR) on International Gold
Price
Correlation
Gold Price CNY in INR
Gold Price 1
CNY in INR -0.075232665 1
The correlation analysis shows that there is a weak negative linear relationship between exchange
rate of CNY in INR and International Gold Price but it is significant as the correlation is -0.075.
This means that if International Gold Price increases, exchange rate of CNY in INR reduces by a
small margin or vice versa.
Exchange rate (CNY in INR) = x
International gold price = y
Regression Statistics
Multiple R 0.075233
R Square 0.00566
Adjusted R Square 0.005278
Standard Error 209.2201
Observations 2608
Coefficients Standard Error t Stat P-value

Intercept 1405.74302 26.60413205 52.8392739 0
-
CNY in INR -11.34404115 2.945381842 3.851467063 0.000120241
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Regression Line: Y = 1405.74 – 11.34 X
Intercept = 1405.74
Beta = - 11.34
With increase in exchange rate, international gold price decreases by $11.34 per ounce.
Multiple R:
Multiple R is the coefficient of multiple correlation. It measures that how two variables move in
relation to one another. It measures the strength of the relationship between X and Y. The Multiple
R is coming as 0.07 which neither shows a strong positive relationship nor a strong negative
relationship.
R Square:
The coefficient of determination (R2), measures the percentage of the change in Y that is explained
by a change in X. The closer it is to 1 the more explanatory power your model has.
Here, 0.57% of the change in international gold price (Y) is explained by a change in exchange
rate (X). So, we can say that only 0.57% movement or variability in gold price is due to exchange
rate but the remaining variability of 99.43% is explained by other factors like interest rate, inflation
rate, crude oil price, repo rate and unexpected events.
Adjusted R square:
The Adjusted R square is a more reliable statistics because it takes into account the sample size. It
is more closely watched than the coefficient of determination, R2. Adjusted R Square is adjusted
with degree of freedom (2) is 0.53%.
Standard Error:
Standard error measures the variability of actual Y values from the predicted Y values. It is the
same as standard deviation. The standard error is coming as 209.2201. This shows that there is
some other variable than the exchange rate i.e. CNY in INR in this case, which is affecting the
gold prices as there is a variation.
Hypothesis Testing:
Null Hypothesis (H0) is- H0: β=0
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Alternate Hypothesis (H1) is- H1: β ≠0
P value:
Calculated p- value is: 0.00012 which is smaller than 0.05(p-value<0.05), therefore we reject
H0 and accept H1.
Conclusion: β is significant.
Both the testing shows that β is significant, therefore it can be concluded that the model carries
statistical significance.
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2. Effect of change in International Gold Price on Chinese Yuan (CNY) in Indian Rupees
(INR)
Regression
Statistics
Multiple R 0.075233
R Square 0.00566
Observations 2608

Intercept 9.575612662 0.171161032 55.94505084 0
Gold Price -0.000498936 0.000129544 -3.851467063 0.00012
Gold Price = x
Exchange Rate (CNY in INR) = y
Regression
Statistics
Multiple R 0.075233
R Square 0.00566
Observations 2608

Intercept 9.575612662 0.171161032 55.94505084 0
Gold Price -0.000498936 0.000129544 -3.851467063 0.00012

Intercept = 19.58
Beta = - 0.00049
With increase in gold price, exchange rates decrease by INR 0.00049
Multiple R:
The Multiple R is coming as 0.075 which neither shows a weak positive relationship.
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R Square:
Here, 0.56% of the change in exchange rate (Y) is explained by a change in gold price (X). So, we
can say that only 0.56% movement or variability in exchange rate is due to gold price but the
remaining variability of 99.44% is explained by other factors like interest rate, inflation rate,
political relationship etc.
Adjusted R square:
Adjusted R Square is adjusted with degree of freedom (2) is 0.53%.
Standard Error:
The standard error is coming as 0.00012. This shows that there is some other variable than the
exchange rate i.e. CNY in INR in this case, which is affecting the gold prices as there is a variation.
The residual graph shows the residuals which are the actual difference between the predicted Y
values and actual Y values. For example: Actual exchange rate is INR 7.1449 and predicted
exchange rate is INR 9.14. Deviation = 1.9
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3. Effect of change in Chinese Yuan (CNY) in Dollars (USD) on International Gold
Price
Correlation
CNY
Gold Price
in $
Gold Price 1
CNY in $ -0.456513 1
The correlation analysis shows that there is a moderate negative relationship between exchange
rate of CNY in USD and International Gold Price. This means that if International Gold Price
increases, exchange rate of $ reduces by a small margin or vice versa but moderately as the
relationship is not strong enough.
To know the extent to which one variable affect another variable, we have run regression analysis
taking international gold price as dependent variable (y) and exchange rate as independent variable
(x) and vice versa.
Exchange rate (CNY in $) = x
Multiple R 0.456513
R Square 0.208404
Observations 2608

Intercept 3606.542097 87.96295387 41.00069334 5.1E-284
CNY in $ -354.3234465 13.5273016 -26.19320963 1.9E-134
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Intercept = 3606.54
Beta = -354.32
Multiple R:
The Multiple R is coming as 0.46 which shows moderate relationship.
R Square:
rate (X). So, we can say that 20.84% movement or variability in gold price is due to exchange rate
which is CNY in $ here but the remaining variability of 79.16% is explained by other factors like
interest rate, inflation rate, crude oil price, repo rate and unexpected events.
Adjusted R square:
Standard Error:
exchange rate i.e. CNY in $ in this case, which is affecting the gold prices as there is a variation.
Hypothesis Testing:
Null Hypothesis (H0) is- H0:β=0

P value:
Calculated p- value is: 1.9E-134 which is smaller than 0.05(p-value<0.05), therefore we reject
H0 and accept H1.
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4. Effect of change in International Gold Price on Chinese Yuan (CNY) in Dollars (USD)
Gold Price = x
Exchange Rate (CNY in $) = y
Regression
Statistics
Multiple R 0.456513
R Square 0.208404
Observations 2608

Intercept 7.264281248 0.029669066 244.8436123 0
Gold Price -0.000588175 2.24552E-05 -26.19320963 1.9224E-134

Intercept = 7.26
Beta = - 0.00059
With increase in gold price, exchange rates decrease by $ 0.00059
Multiple R:
The Multiple R is coming as 0.45 which neither shows a moderate relationship.
R Square:
Here, 19.80% of the change in exchange rate (Y) is explained by a change in gold price (X). So,
we can say that only 19.80% movement or variability in exchange rate is due to gold price but the
Adjusted R square:
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Standard Error:
exchange rate i.e. CNY in $ in this case, which is affecting the gold prices as there is a variation.
The residual plots graph shows the residuals which are the actual difference between the
predicted Y values and actual Y values. For example: Actual exchange rate is $ 0.1466 and
predicted exchange rate is $ 0.1482. Deviation = 0.00168.
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5. Effect of change in Dollars (USD) in Indian Rupees (INR) on International Gold
Price
Correlation
Gold Price $ in INR

Gold Price 1
$ in INR -0.18865138 1
The correlation analysis shows that there is a weak negative relationship between exchange rate of
USD in India and International Gold Price. This means that if International Gold Price increases,
exchange rate of USD in INR reduces by a small margin or vice versa but moderately as the
relationship is not strong enough.
Exchange rate (USD in INR) = x
Multiple R 0.18865138
R Square 0.035589343
Observations 2608

Intercept 1575.117683 27.88897549 56.47815 0
$ in INR -4.68524405 0.477766864 -9.80655 2.55E-22
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Intercept = 3606.54
Beta = -354.32
Multiple R:
The Multiple R is coming as 0.19 which shows weak relationship.
R Square:
rate (X). So, we can say that 3.56% movement or variability in gold price is due to exchange rate
which is USD in INR here but the remaining variability of 96.44% is explained by other factors
like interest rate, inflation rate, crude oil price, repo rate and unexpected events.
Adjusted R square:
Standard Error:
exchange rate i.e. USD in INR in this case, which is affecting the gold prices as there is a variation.
Hypothesis Testing:

P value:
H0 and accept H1.
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6. Effect of change in International Gold Price on Dollars (USD) in Indian Rupees (INR)
Gold Price = x
Exchange Rate ($ in INR) = y
R Square 0.035589343
Observations 2608

Intercept 67.66855687 1.023428594 66.11947062 0
Gold Price -0.007596049 0.000774589 -9.806548757 2.55E-22

Intercept = 67.67
Beta = - 0.0076
With increase in gold price, exchange rates decrease by INR 0.0076
Multiple R:
The Multiple R is coming as 0.188 which shows a weak relationship.
R Square:
Here, 3.56% of the change in exchange rate (Y) is explained by a change in gold price (X). So, we
can say that only 3.56% movement or variability in exchange rate is due to gold price but the
Adjusted R square:
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Standard Error:
exchange rate i.e. $ in INR in this case, which is affecting the gold prices as there is a variation.
The residual plots graph shows the residuals which are the actual difference between the predicted
Y values and actual Y values. For example: Actual exchange rate is INR 48.75 and predicted
exchange rate is INR 61.06. Deviation = 12.3119.
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Understanding the Factors Affecting International Price of Gold
We have chosen three factors to understand the International Price of Gold:
1. US Interest Rate
2. US Inflation Rate
3. Crude Oil Prices
Correlation between Interest Rate and Gold Price, Inflation Rate and Gold
Price and Crude Oil Price and Gold Price
Oil Price
Interest Rate Inflation Rate Gold Price in $
in $
Interest Rate 1
Inflation Rate -0.0756 1
Oil Price in $ -0.37 0.793 1
Gold Price in $ -0.128 0.59 0.568 1
a) We can observe from the above table that there is a weak negative relationship between
Interest Rate and Gold Prices which means that if Interest Rate increases, there is marginal
decrease in the gold prices and vice versa.
b) When we look at the relationship between Inflation Rate and the gold prices, there is
moderate positive relationship between them which means if there is increase in the
inflation rate, gold prices increases as well but moderately.
c) We can also observe that between crude oil price and gold prices, there is again a moderate
positive relationship which means if there is increase in the crude oil prices, gold prices
increases as well but moderately.
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Regression Analysis
1. Interest Rate and Gold Price
Interest Rate = X
International gold price = Y
Regression
Statistics
R Square 0.016377892
Observations 120

Intercept 1323.702038 23.76300229 55.70432651 1.39E-86
-
Interest Rate -45.983313 32.80532905 0.163629
1.401702538

Intercept = 1323.70
Beta = -45.98
With increase in interest rate, international gold prices decreases by $45.98 per ounce.
Multiple R:
The Multiple R is coming as 0.128 which shows weak relationship.
R Square:
Here, 1.64% of the change in international gold price (Y) is explained by a change in interest rate
(X). So, we can say that 1.64% movement or variability in gold price is due to interest rate which
is USD in INR here but the remaining variability of 98.36% is explained by other factors like
exchange rate, inflation rate, crude oil price and unexpected events.
Adjusted R square:
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Standard Error:
interest rate which is affecting the gold prices as there is a variation.
Hypothesis Testing:

P value:
Calculated p- value is: 0.163629 which is smaller than 0.05(p-value<0.05), therefore we reject
H0 and accept H1.
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2. Inflation Rate and Gold Price
Inflation Rate = X
Regression
Statistics
R Square 0.346980357
Observations 120

Intercept 520.4328648 100.1481222 5.196631284 8.60785E-07
Inflation Rate 394.6085977 49.83520134 7.918270361 1.47573E-12
Regression Line: Y = 520.43 + 394.61 X

Intercept = 520.43
Beta = 394.61
With increase in inflation rate, international gold price increases by $394.61 per ounce.
Multiple R:
R Square:
Here, 34.70% of the change in international gold price (Y) is explained by a change in inflation
rate (X). So, we can say that 34.70% movement or variability in gold price is due to inflation rate
but the remaining variability of 65.3% is explained by other factors like interest rate, crude oil
price, exchange rate and unexpected events.
Adjusted R square:
Standard Error:
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inflation rate in this case, which is affecting the gold prices as there is a variation.
Hypothesis Testing:

P value:
H0 and accept H1.
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3. Crude Oil Price and Gold Price
Crude Oil Price = X
Regression
Statistics
R Square 0.322860934
Observations 120

Intercept 908.9022333 54.97728313 16.53232356 1.67208E-32
Oil Price in $ 5.41847491 0.722382554 7.500838552 1.298E-11
Regression Line: Y = 908.90 + 5.42 X

Intercept = 908.90
Beta = 5.42
With increase in crude oil prices, international gold price increases by $5.42 per ounce.
Multiple R:
R Square:
rate (X). So, we can say that 32.29% movement or variability in gold price is due to crude oil
prices here but the remaining variability of 67.71% is explained by other factors like interest rate,
inflation rate, exchange rate and unexpected events.
Adjusted R square:
Standard Error:
30 | P a g e
The standard error is coming as 173.33. This shows that there is some other variable than the crude
oil prices, which is affecting the gold prices as there is a variation.
Hypothesis Testing:

P value:
H0 and accept H1.
31 | P a g e
Analysis
The first part of this paper is attempting to analyze the relationship between Gold price and
Exchange rate in USA and India. The study employs 10 years’ time series data i.e., from 2009 to
2018 for the analysis.
The following reasons are highlighted for justifying the relationship between the variables
mentioned below:
People across the globe consider gold as a mark of luxury and as a measurement of wealth based
on how much gold a family has collected. Gold also plays a significant role in the arena of
investment and consumption. Although the precious yellow metal is not considered as a primary
form of currency in many countries, it still has an important effect on the value of those currencies
too. The Gold market and Foreign exchange market are very attractive to investors, as it gives an
abode of opportunities for investment and other business purposes. Even though it provides a safe
haven to the investors and consumers, the returns and risks provided by these markets are
somewhat unpredictable.
Many countries have been designing their economic policies whilst considering the fluctuations in
the international gold price. As US dollar is accepted as the world’s reserve currency, the
international price of gold is also considered in dollars. Hence, it is imperative that the rate
of dollar has a great impact on gold price.
India is one of the chief importer and consumer of gold in the world. 50% of that demand arises
from wedding occasions. Besides this, it is a common perception in people of keeping their wealth
in stored as gold. In India, gold has been considered as a foundation asset and a valuable asset that
should be passed on from generations to generations. It is also viewed as a secure and liquid
investment. This has caused a yearly rise in the amount of imports of gold in India which has
remained fairly constant despite the weakening of rupee, which gives rise to the negative
relationship between price of gold and value of Indian Rupee.
32 | P a g e
In 2013, the International Monetary Fund (or IMF) gave an estimate that 40 to 50% of the
movement in gold price were due to the effect from dollar. A 1% change in the value of USD leads
to more than 1% change in price of gold. A depreciating exchange rate of dollar increases the
value of other currencies which leads to increase in the demand for precious commodities
like gold. Secondly, when the US dollar starts to fall as compared to other trading options,
then investors flock to other sources to put their money. Gold is a good alternative for them.
Hence it is justified that there is a negative relationship between price of gold and value of dollar.
USA has large amount of debt and its interest is higher than income, due to which there has been
a downward pressure on the dollar and over the years, it has grown weak. This has also created an
inverse relationship. When the international gold prices fall, investors outside the USA get a
benefit as the dollar price of gold rises. Investors will start shifting their assets denominated in
dollars to gold.
The second part of the assignment studied the factors that cause the fluctuation in price of gold.
The analysis of these factors is elaborated below:
Inflation in USA
When the inflation of USA rises, it means that the value of currency falls, so people start to hold
money in the form of gold. Hence, if inflation sustains for a long time period, then gold becomes
a way of hedging as a tool against inflation. This results in increasing the prices of gold during the
times of inflation. The price of gold is stated in US dollars because dollar is the world’s reserve
currency. The dollar has been established as the reserve currency for two reasons: first is that it
was convertible to gold and second, the demand for dollar for settling maximum international
transactions is there because USA is the largest economy in the world and also has the largest
reserves of gold. Hence, both inflation and gold price share a positive correlation. Also, if gold
is taken as an international currency, then an increase in the expected rate of inflation will give
investors the hope of rising buying power and in turn reduce their investment proportion in gold,
hence driving the price of gold upwards.
33 | P a g e
Oil Prices
Commodity markets have been a major attraction for investors across the globe not only as a safe
haven to acquire a hedge against financial and economic risks, but also as an alternate investment
opportunity which have a great extent of certainty in times of instability in the financial market.
Gold and oil are one of the most traded commodities and have become major economic indicators.
Hence, the co-movement between their prices is important for formulating investor expectations,
portfolio management and for formulating policies.
International prices of gold and oil have commonality in features especially in terms of their
financialization for doing trading. Oil and gold are influenced by similar factors like US dollar,
economic factors and global events. Gold is considered as a hedge for inflation for risk averse
people. Oil is an inflation hedge for asset portfolios as it is a major driver of inflation in most
economies. Hence, the positive correlation derived in our findings holds true. Rising oil price is
bad for the economy as it slows the growth and reduces stock prices, so investors start looking for
alternative investment avenues like gold. Hence, Oil price indirectly affects price gold price.
Hence, as the oil prices rise, it results in a rise in the price of gold, which justifies their positive
correlation. Lastly, both the gold and oil trade are majorly invoiced in US dollar. So there pricing
trend are determined by the strength of the dollar as ascertained by its inflation rate. Hence, it can
be stated that they share a similar positive correlation because their prices are driven by a common
factor: inflation rate of USA.
Interest rates in USA
The repo rate is the ratio of commercial banks borrowing money from Federal Reserve. This is
one of the main approaches to control inflation. When the repo rate is high, the borrowing from
the bank will be very low. In fact, it will reduce the purchasing power of the public. This will
reduce investment in gold and ultimately reduce the price of gold. Hence it is justified that there
is an inverse relationship between interest rates and price of gold. However, there is a weak
negative relationship between Interest Rate and Gold Prices which means that if Interest Rate
increases, there is marginal decrease in the gold prices and vice versa.
34 | P a g e
REFERENCES
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2. Arfaoui, M., & Rejeb, A. B. (2017). Oil, gold, US dollar and stock market
interdependencies: A global analytical insight. European Journal of Management and
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3. Ranjusha. N, Dr. Devasia. M. D, and Nandakumar. V. T. (2017). “COINTEGRATING

RELATION BETWEEN EXCHANGE RATE AND GOLD PRICE.” International Journal
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36 | P a g e

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International Finance

A Study on relationship between Currency Fluctuations and Gold

Institute of Management, Nirma University

Sr. No. Topic Page No.

Research Paper 1: “A study on impact of select factors on the price of Gold”

• Crude oil Price

(3) REPO RATE:

(4) INFLATION RATE:

• Oil price versus gold price

• US dollar versus Gold price

Research Paper 6 - 'Gold as an Inflation Hedge?'

Research Paper 7: “A Study on Currency Fluctuations Impact on Gold Price Determination

Research Paper 8 – “Gold and Inflation(s) − A Time-Varying Relationship”

Research Paper 9– “Gold Price and Inflation”

Relationship between Exchange Rates and International Gold Price

Exchange rate (CNY in INR) = x

International gold price = y

Coefficients Standard Error t Stat P-value

Null Hypothesis (H0) is- H0: β=0

Coefficients Standard Error t Stat P-value

Coefficients Standard Error t Stat P-value

Regression Line: Y = 19.58 – 0.00049 X

Adjusted R Square is adjusted with degree of freedom (2) is 0.53%.

Exchange rate (CNY in $) = x

International gold price = y

Coefficients Standard Error t Stat P-value

Adjusted R Square is adjusted with degree of freedom (2) is 20.81%.

Null Hypothesis (H0) is- H0:β=0

Exchange Rate (CNY in $) = y

Coefficients Standard Error t Stat P-value

Regression Line: Y = 7.26 – 0.00059 X

Adjusted R Square is adjusted with degree of freedom (2) is 19.77%.

Gold Price $ in INR

Exchange rate (USD in INR) = x

International gold price = y

Coefficients Standard Error t Stat P-value

Adjusted R Square is adjusted with degree of freedom (2) is 3.52%.

Null Hypothesis (H0) is- H0: β=0

Exchange Rate ($ in INR) = y

Coefficients Standard Error t Stat P-value

Regression Line: Y = 67.67 – 0.0076 X

Adjusted R Square is adjusted with degree of freedom (2) is 3.52%.

International gold price = Y

Coefficients Standard Error t Stat P-value

Regression Line: Y = 1323.70 – 45.98 X

Adjusted R Square is adjusted with degree of freedom (2) is 0.80%.

Null Hypothesis (H0) is- H0: β=0

International gold price = Y

Coefficients Standard Error t Stat P-value

Regression Line: Y = 520.43 + 394.61 X

Adjusted R Square is adjusted with degree of freedom (2) is 34.14%.

Null Hypothesis (H0) is- H0: β=0

International gold price = Y

Coefficients Standard Error t Stat P-value

Regression Line: Y = 908.90 + 5.42 X

Adjusted R Square is adjusted with degree of freedom (2) is 31.71%.

Null Hypothesis (H0) is- H0: β=0

Interest rates in USA

3. Ranjusha. N, Dr. Devasia. M. D, and Nandakumar. V. T. (2017). “COINTEGRATING

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