COMMONWEALTH JOURNAL OF COMMERCE &

MANAGEMENT RESEARCH
Vol.5, Issue 1 (January 2018) ISSN: 2393-851X Impact Factor: 4.382 UGC & ISI Indexed

AN ANALYSIS OF RELATIONSHIP BETWEEN GOLD &

CRUDEOIL PRICES WITH SENSEX AND NIFTY

Dr. S. Nirmala
Research Supervisor, Associate Professor- Department of Business Administration & Principal, PSGR Krishnammal
College for Women, Peelamedu, Coimbatore

Deepthy. K
Research Scholar- PhD, Department of Business Administration, PSGR Krishnammal College for Women,
Peelamedu, Coimbatore

ABSTRACT

This paper attempts to find the inter relationship between gold and crude oil prices
with Sensex and Nifty. This paper takes into account the Gold and Crude oil (WTI)
traded in MCX for the period 1/1/2010 to 30/10/2015. The co-movement of gold and
crude oil prices are then analysed with the Sensex and Nifty prices corresponding to
the period. An ADF test is applied to find if the series have unit root or not.
Correlation analysis is applied to find out the degree of correlation. Further
regression analysis is used to understand the interdependence between gold and
crude oil with Sensex and Nifty.

Key Words: Crude oil, Gold, relationship, sensex, nifty

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 COMMONWEALTH JOURNAL OF COMMERCE &
MANAGEMENT RESEARCH
Vol.5, Issue 1 (January 2018) ISSN: 2393-851X Impact Factor: 4.382 UGC & ISI Indexed

INTRODUCTION
India accounts for 30% of the global market for Gold. Gold is an integral part of lives in India.
However the domestic production of gold is minimal. Much of the demand of gold is met by
imports. Most of the gold purchased by Indians are consumed in the traditional form of
jewellery. Even for the purpose of investment they prefer to store in the physical form. However
with the introduction of Gold Exchange traded funds (Gold ETFs) in 2007, these trends were
expected to change.

India was the fourth largest consumer of crude oil and petroleum products in the world in
2014 after United States, China and Japan. Oil imports constitute about 78.6% of India’s total
domestic oil consumption in 2014-15. Boosted by fallen crude prices, India is expected to
overtake Japan to become the world’s 3rd largest oil consumer, at about 4.1 million in 2015.
Since 2005, India has been responsible for 20% of incremental global oil demand increase,
versus 55% for China.

The gold, crude oil, Sensex and Nifty are variables with similar characteristics. The
prices of all these are determined in free markets and determine the collective expectation of the
economy. The expectation of an investor about what the future would be is reflected in the prices
of these variables. So an analysis of interdependence would be helpful for an investor to know
how Gold and crude oil prices affect stock market Indices Sensex and Nifty

REVIEW OF LITERATURE
(Šimáková, 2011) analysed the relationship between oil and gold prices. The study revealed that
there is a strong correlation and long run equilibrium relationship between them.
(Bapna, I.,et.al 2012) studied the dynamics of macroeconomic variables affecting innovation in
gold. The study used growth rate, exchange rate, interest rate, inflation, NSE Index, BSE Index,
foreign reserves, fiscal deficit and GDP were considered as the variables explaining macro
economic variables. The study revealed that gold works as a commodity for consumption and
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MANAGEMENT RESEARCH
Vol.5, Issue 1 (January 2018) ISSN: 2393-851X Impact Factor: 4.382 UGC & ISI Indexed

investment. The study concluded that gold prices reflect growth rate and gold can be used as an
instrument to hedge inflation.
(Joshi, 2009)studied the impact of fluctuations of stock, forex and crude oil on gold. The study
revealed that the coefficient of determination is moderately high for econometric relationship
with gold.
(Bhunia, 2013)studied the cointegration and causal relationship among crude price, domestic
gold price and financial variables. The study revealed that all the variables are closely
interlinked.
(V.Prabhakaran, 2014) studied dynamic interactions of macroeconomic variables and stock
market movements in India. The study revealed that oil price and exchange rate is having a
significant impact on stock market. The study concluded that exchange rate is having a adverse
impact on stock market and gold is having a positive impact on stock market.
From the review of earlier literature review it is observed that large number of studies
have been made to study the effect of financial variables to macro economic variables. But
studies made to analyse the combined effect of gold and crude oil is few. This paper is an
attempt to analyse the combined effect of gold and crude oil to the financial variables.

RESEARCH METHODOLOGY
The sample period for this study is from 01/01/2010 to 30/10/2015. Monthly prices of Gold
(MAUc1) and Crude oil (MCGBc1), traded in MCX are obtained from the website of MCX and
monthly Sensex and Nifty closing prices are obtained from the website BSE and NSE
respectively. Trend line evaluation, Augmented Dickey Fuller test, Correlation and regression
analysis are used in the study.

OBJECTIVES OF THE STUDY

 To know the impact of gold prices on Sensex and Nifty
 To know the impact of crude oil prices on Sensex and Nifty

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 COMMONWEALTH JOURNAL OF COMMERCE &
MANAGEMENT RESEARCH
Vol.5, Issue 1 (January 2018) ISSN: 2393-851X Impact Factor: 4.382 UGC & ISI Indexed

LIMITATION OF THE STUDY

The period of study is between 01/01/2010 to 30/10/2015, which is medium term. The result of
the inter relationship may vary in the long term.

HYPOTHESIS
H0= Gold Price does not have an impact on Sensex and Nifty

H0= Crude oil Prices does not have an impact on Sensex and Nifty

EMPIRICAL RESULTS

TREND LINE EVALUATION

Chart : 1 Trend movement of Gold and Crude oil

WTI with Sensex and Nifty
35000 10000
Crude oil WTI and Nifty
Sensex and Gold

30000 8000
25000
20000 6000
15000 4000 Gold Price( In INR)
10000
5000 2000 Sensex Price In INR
0 0
NiftyPrice
Jan 01, 2010
Jun 01, 2010

May 01, 2013

Jan 01, 2015

Nov 01, 2010
Apr 01, 2011
Sep 01, 2011
Feb 01, 2012
Jul 01, 2012

Mar 01, 2014

Aug 01, 2014

Jun 01, 2015

Oct 01, 2013
Dec 01, 2012

Crude oil WTI Price in INR

Source: Monthly Closing prices of gold and crude oil are obtained from website of MCX and Sensex and Nifty are
obtained from BSE and NSE respectively.

Interpretation:
From the Chart No: 1 it can be seen that Gold and Crude oil prices move in same direction, but
with respect to Sensex and Nifty they move in opposite directions. The relationship can further
be analysed using correlation and regression analysis.

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MANAGEMENT RESEARCH
Vol.5, Issue 1 (January 2018) ISSN: 2393-851X Impact Factor: 4.382 UGC & ISI Indexed

AUGMENTED DICKEY FULLER TEST

Table: 1 ADF test for Unit root for Gold, Crude oil, Sensex and Nifty at first difference

Variables With Constant With Constant and Trend

t-statistic p-value t-statistic p-value

Gold -9.60814 0.000 -5.37783 0.000

Crude oil -6.31242 0.000 -5.6091 0.000

Sensex -4.11513 0.000 -4.10743 0.000

Nifty -4.23331 0.000 -7.44624 0.000

Source: Author’s Calculations

From the table no:1, it can be seen that the p-values of all the variables are less than 0.05. So it
can be concluded that the variables are stationary at their first difference. To do Correlation and
Regression analysis, Log values of the variables has been used.

CORRELATION MATRIX

Table: 2 Correlation coefficients, using the observations 2010:01 - 2015:10

LGold LSensex LCrudePrice LNifty

1.0000 0.2233 0.5540 0.2274 LGold
1.0000 -0.2283 0.9991 LSensex
1.0000 -0.2461 LCrudePrice
1.0000 LNifty
Source: Author’s Calculations
From the Table: 2 it can be seen that gold is having a low positive correlation with Sensex
(0.2233) and Nifty (0.2274 ). This means that the variables are moving in same direction. Crude

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MANAGEMENT RESEARCH
Vol.5, Issue 1 (January 2018) ISSN: 2393-851X Impact Factor: 4.382 UGC & ISI Indexed

oil is having a positive correlation with gold (0.5540) but a negative correlation with Sensex(-
0.2283) and Nifty(-0.2461)

The relationship can further be analysed using Regression analysis

REGRESSION ANALYSIS BETWEEN SENSEX, GOLD AND CRUDE PRICES

Table 3: OLS, using observations 2010:01-2015:10 (T = 70)
Dependent variable: LSensex

Coefficient Std. Error t-ratio p-value

const 8.12873 1.10641 7.3470 <0.00001 ***
LGold 0.50957 0.130125 3.9160 0.00021 ***
LCrudePrice -0.400226 0.101553 -3.9411 0.00020 ***

Mean dependent var 9.926330 S.D. dependent var 0.184687

Sum squared resid 1.815336 S.E. of regression 0.164604
R-squared 0.228679 Adjusted R-squared 0.205655
F(2, 67) 9.931997 P-value(F) 0.000167
Log-likelihood 28.50216 Akaike criterion -51.00433
Schwarz criterion -44.25884 Hannan-Quinn -48.32494
Rho 0.928291 Durbin-Watson 0.138957
Source: Author’s Calculation

In the table no.3, The Adjusted R squared value is 0.21. This shows that 21% of variation in
Sensex price can be explained through the variation in gold and crude oil prices.
From the table no.3, it can be concluded that there is a positive correlation between gold
price and Sensex price. By observing the table above, it is evident that for 1% increase in gold
price, there is 0.51% increase in Sensex price. The standard error is 0.13 which is not low, which
means that error in linear relation is not high. So the null hypothesis “Gold price does not have
an impact on Sensex price” is rejected.
From the table no. 3 it can also be concluded that there is a negative correlation between
Crude oil and Sensex. For an increase in price of crude oil by 1% there is a decrease in Sensex

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 COMMONWEALTH JOURNAL OF COMMERCE &
MANAGEMENT RESEARCH
Vol.5, Issue 1 (January 2018) ISSN: 2393-851X Impact Factor: 4.382 UGC & ISI Indexed

price by 0.40%. So the null hypothesis “Crude oil price does not have an impact on Sensex
price” is rejected.

JOINT SIGNIFICANCE TEST

This test is conducted to know the overall model significance.
H0=β2=β3=0
H1=βi≠0 for at least one i
Restriction set
1: b[LGold] = 0
2: b[LCrudePrice] = 0

Test statistic: F(2, 67) = 9.932, with p-value = 0.000166868

Table no: 4 Restricted estimates:

Coefficient Std. Error T-Ratio P-Value

const 9.92633 0.0220743 449.7 2.32e-121 ***

LGold 0.000000 0.000000 NA NA
LCrudePrice 0.000000 0.000000 NA NA

Standard error of the regression = 0.184687

Source: Author’s Calculations
From the table no: 4 it is seen that the F statistic is 9.932 with a p value of 0.0001. This
means that the null hypothesis is rejected and it is concluded that the overall model is significant
at 5% significant level. Residuals are tested for normality and it found to be normally distributed.

REGRESSION EQUATION:
LSensex = 8.13 +0.510*LGold Price- 0.400*Lcrudeprice

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Vol.5, Issue 1 (January 2018) ISSN: 2393-851X Impact Factor: 4.382 UGC & ISI Indexed

REGRESSION ANALYSIS BETWEEN NIFTY, GOLD AND CRUDE OIL PRICES

Table 5: OLS, using observations 2010:01-2015:10 (T = 70)

Dependent variable:LNifty

Coefficient Std. Error t-ratio p-value

const 6.90746 1.09318 6.3187 <0.00001 ***
LGold 0.53153 0.128569 4.1342 0.00010 ***
LCrudePrice -0.424333 0.100338 -4.2290 0.00007 ***

Mean dependent var 8.724714 S.D. dependent var 0.185242

Sum squared resid 1.772186 S.E. of regression 0.162636
R-squared 0.251522 Adjusted R-squared 0.229179
F(2, 67) 11.25747 P-value(F) 0.000061
Log-likelihood 29.34415 Akaike criterion -52.68830
Schwarz criterion -45.94281 Hannan-Quinn -50.00891
Rho 0.921252 Durbin-Watson 0.151917
Source: Author’s Calculations

From the table no: 5 it can be seen that the Adjusted R squared value is 0.23. This means that
23% of the variation in Nifty price can be explained through the variation in Gold and Crude oil
prices.
From the table no:5 it can be concluded that for 1% increase in gold price Nifty increases
by 0.53%. The standard error is 0.13 which is not high, which means that error in linear relation
is not high. So the hypothesis” Gold prices does not have an impact on Nifty” is rejected.
From the table no:5 it can also be concluded that there is a negative correlation between Crude
oil and Sensex. For an increase in price of crude oil by 1% there is a decrease in Nifty by 0.43%.
So the null hypothesis “Crude oil price does not have an impact on Nifty” is rejected.

JOINT SIGNIFICANCE TEST

This test is conducted to know the overall model significance.
H0=β2=β3=0
H1=βi≠0 for at least one i

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Vol.5, Issue 1 (January 2018) ISSN: 2393-851X Impact Factor: 4.382 UGC & ISI Indexed

Restriction set
1: b[LGold] = 0
2: b[LCrudePrice] = 0

Test statistic: F(2, 67) = 11.2575, with p-value = 6.09546e-005

Table no: 6 Restricted estimates:

coefficient std. error t-ratio p-value

const 8.72471 0.0221407 394.1 2.09e-117 ***

LGold 0.000000 0.000000 NA NA
LCrudePrice 0.000000 0.000000 NA NA

Standard error of the regression = 0.185242

Source: Author’s Calculations

From the table no: 6 it is seen that the F statistic is 11.2575 with a p value of 0.000. This means
that the null hypothesis is rejected and it is concluded that the overall model is significant at 5%
significant level. Residuals are tested for normality and it found to be normally distributed.

REGRESSION EQUATION:
LNifty = 6.91 + 0.532*LGold - 0.424*LCrudeprice

CONCLUSION
There exists a low positive correlation between Gold and Sensex and Nifty. In short term both
sensex and nifty move in same direction with gold but in the long run an increase in gold price
may cause a decrease in sensex and nifty as the investors may shift from the expensive gold
investment to cheaper equities. Crude oil has a negative correlation with Sensex and Nifty. By
looking into regression analysis it can be concluded that increase in crude oil prices have a
negative impact on Sensex and Nifty. The prices of Oil have an important role to play in
deciding any company's performance. Sensex and Nifty is in turn is a function of companies’

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Vol.5, Issue 1 (January 2018) ISSN: 2393-851X Impact Factor: 4.382 UGC & ISI Indexed

performance. So in this way both are connected to each other. The decreasing crude oil prices
make many companies more efficient but any decrease beyond a point start deteriorating other
oil economies who are largest consumer of India’s production, in turn start consuming less
because of recession. Hence it affects the company's earning on sales front thereby washing
away the benefits which it received while producing the goods. So it can be concluded that
decrease in crude oil prices may increase Sensex and Nifty in short and medium run but in long
run, both Sensex and Crude oil prices move in same direction

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MANAGEMENT RESEARCH
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