Analysis of Stock Market and the Bullion Market
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Published: Mon, 26 Feb 2018
This project reexamines the comparative relationship between stock prices and bullion market in India i.e. gold spot prices for 2006-07 to 2009-10. The study looks after the variation of stock market and gold market in India. The future of the gold and gold price movements are determined by the perception of gold as a `store of value’ rather than its fundamentals as a commodity. The precious metal’s value is also determined by such factors as inflation, interest rates and the presence of lucrative alternative investment avenues in the economy. The comparative relationship tested between the BSE index and spot gold prices of bullion market of India. Gold price is included in the model as an additional variable, to examine whether gold price contain any additional significant information about price movements. 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 and for speculative purposes.
Conceptual definition/key words
Introduction to the study
This study is an attempt made to find the comparative analysis of the stock market and the bullion market. This study will also indicate the potential of the two asset classes and the scope for investing in India.
A stock market, or equity market, is a private or public market for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. The size of the world stock market is estimated at about $36.6 trillion US at the beginning of October 2008. The total world derivatives market has been estimated at about $791 trillion face or nominal value, 11 times the size of the entire world economy.
The stocks are listed and traded on stock exchanges which are entities a corporation or mutual organization specialized in the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together.
The stock market is one of the most important sources for companies to raise money. This allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate.
In the last 6,000 years a little over 125,000 tones of gold has been mined. But this history is clearly divided into two eras – before and after the California gold rush of 1848. Some calculations suggest that up until then scarcely 10,000 tones of gold had been excavated since the beginning of time. Thus more than 90% of the world’s gold has been produced since 1848.
The story of gold is as rich and complex as the metal itself Wars have been fought for it; love has been declared with it. Ancient Egyptian hieroglyphs portray gold as the brilliance of the sun; modern astronomers use mirrors coated with gold to capture images of the heavens.By 325 BC the Greeks had mined for gold from Gibraltar to Asia Minor. In 1848 AD John Marshall found flakes of gold whilst building a sawmill near Sacramento and so triggered the gold rush in California.Held securely in national vaults as a reserve asset, gold has an irrefutable logic; released from the tombs of pharaohs and emperors alike, gold has an undeniable magic. In Heritage we describe just some of the key moments from gold’s history. Further sections take time to discuss important fundamental issues such as the relationship of demand and supply, gold’s price history; the golden constant and gold’s contribution to society.
Review of Literature:
The Sensex and the gold prices for a four year period constituted the database. In a recent study conducted by Steve Saville on ‘Gold and the Stock Market during recession’ this study examines the gold and stock markets in the world markets for the periods of recession. The study brought out the performance of the two asset classes during recession for the last 10 recessions. The comparison on the gold and stock market awaits the Indian context based on this the researcher set to examine the same.
The Literature review clearly indicates that the studies are carried out in abroad and not much in INDIA regarding the selected topic. Though some of the data is available it is all relating to the last year data and no study is made up to date, comparing both bullion and sensex.
- To know the variation, volatility, risk and return on BSE Sensex Indices in Comparison with Gold Spot Rates in Mumbai.
- To analyze the performance of BSE Sensex Indices in Comparison with Gold Spot Rates in India between 2006-07 and 2009-10.
- To provide information about effect of investing Equity and Gold.
Objective of the study
- Relationship between the stock market and the bullion market.
- To study the Bombay Stock Exchange and the Gold bullion market.
- To analyze the stock market and the bullion market in the Indian context.
- To study the interrelationship among the Bombay Stock Exchange and the Gold bullion market.
- To formulate strategies for investors to invest in based on trends.
SCOPE OF THE STUDY:
- Comparative relationship between stock prices and bullion market in India i.e. gold spot prices for 2006-07 to 2009-10.
- Comparative returns on investment in Equity and Gold.
- Variations in Sensex and Gold Spot rates by Monthly wise, Quarterly wise and Year Wise of Indices of BSE, Mumbai and Spot Gold Rates of Bullion Market, Mumbai with Charts and Graphs.
STATEMENT OF THE PROBLEM:
The stocks have risk, which comprises of either unique risk also called as diversifiable risk or unsystematic risk and market risk also called non-diversifiable risk or systematic risk. There are few problems, which reveal the necessary to analyze the variation of the equity shares indices and gold spot rates. We can neither predict the risk involved nor the future performance of the stock. Many equities have not performed well due to which investor has incurred losses. Presently study tries to find out the variation, volatility, risk and return on BSE Sensex Indices in Comparison with Gold Spot Rates in Mumbai has been undertaken.
METHOD OF RESEARCH DESIGN TO BE USED UNDER THE STUDY:
In this research an attempt has been made to analyze the past performance of BSE Sensex and Gold Spot Rates of Mumbai that are considered to be leading indicators of the Stock market and Bullion market. The study is to be done to know the variation, volatility of these markets for the past 4 years.
The collection of average values of the BSE Sensex indices and Gold spot rates of Mumbai, on a monthly basis for comparison.
METHODOLOGY OF DATA COLLECTION:
A Sample is a small representation of lot of population selected at random. The random of drawing a sample form from a large population is called sampling. Sampling data in this study comprised of BSE Sensex Indices and Gold Spot Rates in Mumbai for the period of 2006-07 to 2009-10. Each with monthly average values was taken for the study.
SOURCES OF DATA:
Primary data:’Are those which are collected a fresh and for the first time and thus happens to be original in character’ observation and personnel discussion with Internal Guide and External Guide.
Secondary Sources of data: The sources of data were only the secondary source as the comparison is done keeping BSE Sensex Indices and Gold Spot Rates. Thus the project did not require any first hand information in the form of primary source. The data were collected through the sources like the www.rbi.org.in for getting the share prices and spot prices of past 4 years.
LIMITATIONS OF THE STUDY:
The study is restricted to BSE Sensex Indices of Stock Market and Gold Spot rates in Mumbai Bullion Market.
The time period for the project was limited and information provided is limited to Internet and Journals.
It focuses on every month Average Values during the period from 2006-07 to 2009-10.
The above Chart shows that:
Totally BSE Sensex has shown upward trend up to Quarter-3 of 2007-08 and there is continuous decreasing trend upto Quarter-4 of 2008-09 due to the Worldwide recession and Economic Slow down in India. Then from Quarter-1, there is great recovery of +92.36% in 2009-10.
Totally Gold Becomes costlier by every Quarter gradually and constantly.
By Comparison in 2009-10 BSE Sensex has +83.36% more return on investment than Gold. But this increase by BSE Sensex is the recovery of the previous years economic slow down in India and Worldwide recession.
The comparison of the Sensex and the Gold prices for the period of four years from January 2006 to the 31st December 2010 it can be seen that the prices of gold and the Sensex do not follow a same pattern, this is very important to investors as this is indication of two classes of investments that are negatively correlated and investing in both reduces the risk of loss. This is possible through diversification where investing in two different asset classes. From the graph it can be seen that the Sensex rallied from May 2006 from the 9000 level leaving the Gold behind, this continued till January 2008 where the Sensex reached its all time high of 21000. The price of Gold however was in the price range of 9000 to 10000 from July 2006 to December 2007. It is evident that when the stock market started crashing that the Gold prices started soaring and was on a constant upward trend. In the month of September 2008 the prices of the Sensex and Gold went in opposite direction, this is a clear indication that the two are oppositely correlated.
The above graph can be divided into three parts. The first can be year 2006 where the price of Gold and the Sensex moved in the same upward direction till mid May of 2006 where there was a resistance for both the investments and the price came down to the April 2006 mark, then there was a support where the month of June saw the price of Gold and the Sensex at the same level. From August 2006 the price of the Sensex rallied faster then that of Gold to touching a new high of 15000 on the Sensex. The second part of the research period saw the price of the Sensex still rallying in the year of 2007 the same as the end of 2006. The price of Gold continued to rise but on a constant basis and with a gradual increase. The price of the Sensex during the month of September rose on a constant basis to touch a new high of 20500 in the month of December. The next part of the research period 2008 saw the Sensex crash but the price of Gold was not affected with the crash. Wile the Sensex continued to decline the price of Gold touched a new high in the month of October 2008 of 13000 rupees for every 10 grams. The last part of the research shows that First and second quarter the BSE sensex is seen a bigger growth with 40%and 20% where as at third quarters we can notice gold change is drastic with 10.06% and the last quarter ie up to December 2010 with negligible difference between the two investments.
In this project the researcher set to analyze the comparison between the stock market and the gold market. From the results and analysis that have been conducted, it can be concluded that gold in-deed is a better investment as compared to stock (during the research period) and is a good asset to include in a portfolio for diversification. The combination of the Sensex stock and Gold in a portfolio is also a good investment strategy as these asset classes are both negatively correlated, and this low correlation improves the stability of the portfolio.
In the analysis the researcher compared gold to sensex to see the performance of which asset class was good. The results of this comparison showed gold to be a good investment, with an overall higher return. The Sensex is an index composed of 30 multinational companies, thus it has a high market risk. Gold on the other hand is not an index, it is a valuable metal; it therefore has a high unique risk.
In the long run, if money was placed in gold and Sensex (2006-2008), it has evidently been seen that the allocation should be around 50% in gold and 50% in the Sensex to obtain an Optimal Portfolio. Thus in the long run, gold has proven to be an efficient investment when combined with the Sensex. With gold’s past performance in mind, the researcher would recommend an investor today to hold gold in his/her investment portfolio. This is because of the uncertain environment of today, and due to the high return for gold. The optimal amount to invest in gold could however be questioned. For an investor with a long time horizon, a high amount of gold could be more easily defended than for a short term investor. In the long run, spotted short term deviations have tended to smooth out, to an optimal allocation around 50% in gold. Even though it may be hard to predict, the researcher would still urge investors to own a portion of gold in his/her portfolio today, due to the high return to risk characteristics of gold.
Based on the findings the researcher would give the following recommendations to investors.
An investor should invest in Gold and the Sensex to get maximum returns as both the asset classes are negatively correlated and a good combination for diversification.
A 50-50% can be invested in both the asset classes as the loss in one will be compensated in the other which will balance the portfolio, as compared to investing in one and facing huge losses or profits which are not always known.
Gold has a tendency to rise in India based on demand seasonally, this is particularly true in the season of marriages, and the researcher would recommend investors to buy Gold in times when there is less demand and sell at the times where demand increases.
Stock market is very unpredictable and a company can loose its standing in the economy for the smallest of mistakes or problems faced, but Gold on the other hand will never loose its value and this has been evident for thousands of years and it is even today used as a precious metal.
An investor should not invest in Gold for short term but for a long term, as gold in the short term dose not return the same as that of the stock market.
If an investor believes in ‘buy low, sell high’, gold is still low, but climbing and it’s never too late to invest in gold.
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