A REPORT

ON
RELATIONSHIP AMONG GOLD, OIL
AND DOLLAR (GOD)

BY
SANKET JOSHI.
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A REPORT
ON
RELATIONSHIP AMONG GOLD, OIL
AND DOLLAR (GOD)

BY
SANKET JOSHI (07BS3589)

A report submitted in partial fulfillment of

the requirements of MBA Program

Distribution List: IBS-GURGAON

Acknowledgements

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I strongly believe that anything worthwhile is created only with the support and
guidance of many people. Writing of acknowledgement gives me a feeling as if I
have got a golden chance to thank all those who have helped me in some way or
the other in preparing this project report. This project would not have been
completed without the help of those well wishers & friends.

With immense pleasure I pay my gratitude to ICFAI BUSINESS SCHOOL,

GURGAON faculties for their wholehearted corporation and guidance. The amicable
and nurturing ambience provided by them has really made my MRP is a pleasure
experience to cherish with.

I acknowledge with gratitude to Prof. Renu Verma (Faculty Guide) for their
extreme support and guidance, without which this report wouldn’t have been
possible.

We hope that the report will help to assimilate and learn from best practices shared
by others in the particular area.

Last but not the least, I thankful to my all friends for making this report possible.

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Table of contents
Acknowledgments
3

Abstract 5

1. Introduction
6

1.1 Industry profile 6

1.2 Gold 7
1.3 Oil 12
1.4 Dollar 16

2. Research Problem
19

2.1 Objectives 19
2.2 Methodology for research
20
2.3 Limitation of the study
20

3. Analysis and interpretation

21

3.1 correlation analysis

22
3.2 Regression analysis
22

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3.3 Inseparable triplets : Gold, Oil and Dollar(GOD)

27
3.4 Impact on inflation
28
3.5 Future of G.O.D 29

4. Findings 31

5. Conclusion
32

6. Bibliography
33

Abstract

The MRP undertaken by me at IBS, GURGAON has given me an exposure into

the area of gold, oil and dollar in India. The project I am involved includes an
analysis of GOD. Moreover, I am going to cover relationship among these
triplets. This involves catering to the queries of investors about the gold, oil
and dollar relationship.

Thus the work done and the final project accomplished in three parts:

PART A: ABOUT GOLD, OIL AND DOLLAR

PART B: ANALYSIS AND INTERPRETATION OF GOD

PART C: FINDINGS AND SUGGESTIONS

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I sincerely feel that I have been successful in accomplishment of my
objective. In spite of taking best possible measures, mistakes are likely to
creep in, for which I tender my sincere apologies.

Introduction
In present era, where we are living in the globalization and everything
has been connected with particular matter. You cannot isolate yourself
or your viewpoints because it’s some or other way touches to other
points as well. Let us come to our management research project where
topic inclined towards globalization with our Indian economy. We are
going to find out the relationship among triplets gold, oil and dollar
(exchange rate).

Industry
profile

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This topic is very crucial for analysts’ point of view and for Indian
economy point of view. From history, we have seen some of the
correlation among these commodities and we are trying to capitalize
these three commodities on our investment strategy and in portfolio
decision.

We will explain these triplets and give highlights of these three triplets.
We are going to cover characteristics of these triplets. Sometimes gold
and oil behave same as the dollar moving and sometimes we have
seen this trio affect each other and also following some pattern. There
are some different type of pattern following by this trio and we can find
out how they are going to behave in future in respect to the economy
and how can we use them in a better way to find out the solution of
the some sever problem of Indian economy.

India, a second fastest growing economy in the world, has a major

dependency of oil on oil exporting countries. Our 70-80% of
requirement has been fulfilled by imports of oil and which is the largest
outflow of forex reserve. Though, we are second fastest growing
economy but in the terms of energy, we are far away from our peers
and major chunk of our forex reserve has been using for this purpose
only.

This problem is become very severe and reaches to an extent where

govt. has to decide or restructure of pricing pattern of oil. Sometimes
dollar prices also affect the oil bills because we have to pay this oil
importing bill in dollar for that matter we have to reserve currency in
dollar. When dollar became unstable and RBI has been trying to kept
them in limit but oil prices and uncertainty in exchange rate create big
mess for Indian government. Through this report am trying to cover
this burning issue and how to convert it into opportunity and how to
use this relationship for the betterment of the Indian society and Indian
economy.

1.GOLD
• Profile
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• Characteristics
• What make it so special?
• What makes gold different from other
commodities?
• Factors affecting gold prices

GOLD

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Gold has its own day as the most liquid asset when the central banks
of the world over adhere to gold standard. It played a prime role in
determination of exchange rate until the oil crisis in 1970s dethroned
it. Since then along with the dollar, gold and oil prices have been
moving in a predictable manner. The 1990s have witnessed the “Asian
financial crisis” that started in July 1997 which initially made many
countries to pile up huge dollars as reserves to protect themselves
against the run on their currencies. In the last few years the asian
economies started relying more on their domestic demand for growth
as a result of which the dollar started losing its sheen, yet it retains its
shine as ‘petro-dollars’ are still dominating the world economy and
gold is still held as a hedge against inflation.

Gold is a unique asset, based on few basic characteristics. First, it is

primarily a monetary asset and partly a commodity. As currency, gold
is a universal currency, two-thirds of gold’s total accumulated holdings
relate to ‘store of value’ consideration. Holding in this category include
the central bank reserves, private investments, and high cartage
jewelry bought primarily in developing countries as a vehicle for saving
and in developed countries as a hedge against inflation. Thus, gold is a
primarily a monetary asset.

Characteristics of gold
1. Gold is primarily a monetary asset used to hedge against inflation
rather than being a commodity.
2. Even today two-thirds of total accumulated holding are with the
central banks holding as reserves and private players.
3. Less than one-third of gold’s total accumulated holding is as a
commodity for jewelry in western markets and usage in industry.
4. Gold has more stock than demand, so the price of gold is driven by
the stock equilibrium rather than flow equilibrium.

What makes gold special?

1. Timeless and Very Timely Investment:
For thousands of years, gold has been prized for its rarity, its
beauty, and above all, for its unique characteristics as a store of
value. Nations may rise and fall, currencies come and go, but gold

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endures. In today’s uncertain climate, many investors turn to gold
because it is an important and secure asset that can be tapped at
any time, under virtually any circumstances. But there is another
side to gold that is equally important, and that is its day-to-day
performance as a stabilizing influence for investment portfolios.
These advantages are currently attracting considerable attention
from financial professionals and sophisticated investors worldwide.
2. Gold is an effective diversifier:
Diversification helps protect your portfolio against fluctuations in
the value of any one-asset class. Gold is an ideal diversifier,
because the economic forces that determine the price of gold are
different from, and in many cases opposed to, the forces that
influence most financial assets.
3. Gold is the ideal gift:
In many cultures, gold serves as a family treasure or a wealth
transfer vehicle that is passed on from generation to generation.
Gold bullion coins make excellent gifts for birthdays, graduations,
weddings, holidays and other occasions. They are appreciated as
much for their intrinsic value as for their mystical appeal and
beauty. And because gold is available in a wide range of sizes and
denominations, you don’t need to be wealthy to give the gift of
gold.
4. Gold is highly liquid:
Gold can be readily bought or sold 24 hours a day, in large
denominations and at narrow spreads. This cannot be said of most
other investments, including stocks of the world’s largest
corporations. Gold is also more liquid than many © Multi
Commodity Exchange of India Ltd. alternative assets such as
venture capital, real estate, and timberland. Gold proved to be the
most effective means of raising cash during the 1987 stock market
crash, and again during the 1997/98 Asian debt crisis. So holding a
portion of your portfolio in gold can be invaluable in moments when
cash is essential, whether for margin calls or other needs.
5. Gold responds when you need it most:
Recent independent studies have revealed that traditional
diversifiers often fall during times of market stress or instability. On
these occasions, most asset classes (including traditional
diversifiers such as bonds and alternative assets) all move together

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in the same direction. There is no “cushioning” effect of a
diversified portfolio — leaving investors disappointed. However, a
small allocation of gold has been proven to significantly improve the
consistency of portfolio performance, during both stable and
unstable financial periods. Greater consistency of performance
leads to a desirable outcome — an investor whose expectations are
met.

What makes gold different from other

commodities?

The flow demand of commodities is driven primarily by exogenous

variables that are subject to the business cycle, such as GDP or
absorption. Consequently, one would expect that a sudden
unanticipated increase in the demand for a given commodity that is
not met by an immediate increase in supply should, all else being
equal, drive the price of the commodity upwards. However, it is our
contention that, in the case of gold, buffer stocks can be supplied
with perfect elasticity. If this argument holds true, no such upward
price pressure will be observed in the gold market in the presence
of a positive demand shock. The existence of a sophisticated liquid
market in gold has, over the past 15 years, provided a mechanism
for gold held by central banks and other major institutions to come
back to the market. Although the demand for gold as an industrial
input or as a final product differs across regions, it is argued that
the core driver of the real price of gold is stock equilibrium rather
than flow equilibrium. This is not to say that exogenous shifts in flow
demand will have no
Influence at all on the price of gold, but rather that the large supply
of inventory is likely to dampen any resultant spikes in price. The
extent of this dampening effect depends on the gestation lag within
which liquid inventories can be converted in industrial inputs. In the
gold industry such time lags are typically very short.

Gold has three crucial attributes that, combined, set it apart from
other commodities: firstly, assayed gold is homogeneous; secondly,

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gold is indestructible and fungible; and thirdly, the inventory of
aboveground stocks is astronomically large relative to changes in
flow demand. One consequence of these attributes is a dramatic
reduction in gestation lags, given low search costs and the well-
developed leasing market. One would expect that the time required
converting bullion into producer inventory is short, relative to other
commodities which may be less liquid and less homogenous than
gold and may require longer time scales to extract and be
converted into usable producer inventory, making them more
vulnerable to cyclical price volatility. Of course, because of the
variability of demand, the price responsiveness of each commodity
will depend in part on precautionary inventory holdings.

There is low to negative correlation between returns on gold and

those on stock markets, whereas it is well known that stock and
bond market returns are highly correlated with GDP. This is
because, generally speaking, GDP is a leading indicator of
productivity: during a boom, dividends can be expected to rise. On
the other hand, the increased demand for credit, counter-cyclical
monetary policy and higher expected inflation that characterize
booms typically depress bond prices.

The fundamental differences between gold and other financial

assets and commodities give rise to the following “hard line”
hypothesis: the impact of cyclical demand using as proxies GDP,
inflation, nominal and real interest rates, and the term structure of
interest rates on returns on gold, is negligible, in contrast to the
impact of cyclical demand on other commodities and financial
assets.

Using the gold price and US macroeconomic and financial market

quarterly data from January 1975 to December 2001, the following
conclusions may be drawn:

• There is no statistically significant correlation between returns on

gold and changes in macroeconomic variables, such as GDP,
inflation and interest rates; whereas returns on other financial
assets, such as the Dow Jones Industrial Average, Standard & Poor’s

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500 index and 10-year government bonds, are highly correlated
with changes in macroeconomic variables.
• Macroeconomic variables have a much stronger impact on other
commodities (such as aluminum, oil and zinc) than they do on gold.
• Returns on gold are less correlated with equity and bond indices
than are returns on other commodities.

Assets that are not correlated with mainstream financial assets are
valuable when it comes to managing portfolio risk. This research
establishes a theoretical underpinning for the absence of a
relationship that has been demonstrated empirically for a number of
years; namely, that between returns on gold and those on other
financial assets.

1.Oil
• Products derived from oil
• Facts of crude oil
• Oil units
• Factors affecting oil prices

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Oil

Crude or crude oil is a mixture of hydrocarbons that exists in a

liquid phase in natural
underground reservoirs. It remains liquid at atmospheric pressure
after passing through surface separating facilities. Production
volumes reported as crude oil include:
• Liquids technically defined as crude oil;
• Small amounts of hydrocarbons that exist in the gaseous phase
in natural underground reservoirs, but which are liquid at
atmospheric pressure after being recovered from oil well (casing
head) gas in lease separators;
• Small amounts of non-hydrocarbons produced with the oil.

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Products derived from crude

In India, following items are produced form crude oil,

• Light distillates (includes LPG, Mogas, Naptha, LD i.e.Propylene,

C-3, Propane, Hexane, Special Boiling Point Spirit, Benzene,
Toluene, Petroleum Hydro Carbon Solvent, Natural Heptane, Methyl
Tertiary Butyl Ether, Poly Isobutine, PBFS and MEKFS)

• Middle distillates (includes Kerosen, ATF, RTF, Jet A-1, HSD, LDO,
MD i.e Mineral Turpentine Oil, JP-5, Linear Alkyl Benzene Feed Stock,
Aromex, Jute Batching Oil, Solvent 1425, Low Sulphur Heavy fuel
HSD, DHCB and Special Kerosene)

• Heavy ends (includes Furnace oil, LSHS, HHS, RFO, Lube oils,
Bitumen, Petroleum coke, Paraffin wax, other waxes etc.)

There are in fact many products obtained from the processing of

crude oil, and other hydrocarbon compounds. These include
aviation gasoline, motor gasoline, naphtha, kerosene, jet fuel,
distillate fuel oil, residual fuel oil, liquefied petroleum gas,
lubricants, paraffin wax, petroleum coke, asphalt and other
products.

Following are some of the products; -

Gasoline: a mixture of relatively volatile hydrocarbons, with or

without small quantities of additives, that have been blended to
form a fuel suitable for use in internal combustion engines; includes
gasoline used in aviation.

Kerosene: medium hydrocarbon distillates in the 150° to 280° C

distillation range, and used as a heating fuel as well as for certain
types of internal combustion engine; includes jet fuel, which is a fuel
of naphtha, or of kerosene type, suitable for commercial or military
purposes in aircraft turbine engines.

Distillates: middle distillate type of hydrocarbons. Included are

products similar to number one and number two heating oils and

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diesel fuels. These products are used for space heating, diesel
engine fuel and electrical power generation.

Residual fuel oil: these are fuels obtained as liquid still bottoms
from the distillation of crude used alone or in blends with heavy
liquids from other refinery process operations. It is used for the
generation of electric power, space heating, vessel bunkering and
various industrial purposes.

Crude oil is the lifeblood of modern world. Crude oil prices, to a

large extent determine the health and wealth of world economy and
many a time, shapes up the global politics too. Oil is a major
source of energy that is extensively used around the world.
Sustained spikes in oil prices paint a bleak picture of the global
economy, because oil is an important input for gasoline, heating
oil, kerosene and other petroleum products and all these have
multiple linkages. Due to its high energy density, easy
transportability and relative abundance, it
has become the world's most important source of energy since the
mid-1950s. Petroleum is also the raw material for many chemical
products, including solvents, fertilizers, pesticides, and plastics; the
16% not used for energy production is converted into these other
materials. The cascading effects of the spikes in prices can be
devastating as they cause tremendous inflationary pressures. The
IMF and the OECD sources suggest that a US$10 price rise is
consistent with the
Loss 0.5% of world GDP in the first year.

Facts of crude oil

World
• Balance recoverable reserve is about 142.7 billion tones 2002, of
which OPEC is 112 billion tonnes
• Production is about 3557 million tones 2002, of which OPEC is
1384 million tones
• Refinery capacity is about (2002) 4166 mn tones/ year
India

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• Balance recoverable reserve is about 733 million tones 2003, of
which offshore is 394 mn tones and on shore is 339 million tonnes
• Production of crude oil in 2002-03 is 33.04 million tones
• Import of crude oil 81.99 mn tones valued at Rs 761.95 billion (02-
03)
• Crude oil produced onshore in Gujarat, Assam, Nagaland,
Arunachal Pradesh, Tamil Nadu and Andhra Pradesh.

Oil units

1 Tonne = 7.33 Barrel

= 1.165 Cubic Meters (kilolitres)

1 Barrel = 0.136 Tonnes

= 0.159 Cubic Meters (Kilolitres)

1 Cubic Meter = 0.858 Tonnes

= 6.289 Barrels

1 Million Tonne = 1.111 Billion Cubic Meters Natural Gas

= 39.2 Billion Cubic Feet Natural Gas
= 0.805 Million Tonnes LNG
= 40.4 Trillion British Thermal Units

Factors affecting oil prices

• dollar fluctuation
• economic condition
• demand-supply gap
• production cut
• tension among OPEC countries
• US policy

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1.Dollar
• Dollar history
• Dollar valuation
• Factor affecting dollar

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Dollar
The United States dollar (sign: $; code: USD) is the unit of currency
of the United States and was defined by the Coinage Act of 1792 to
be between 371 and 416 grains (27.0 g) of silver (depending on
purity). The U.S. dollar is normally abbreviated as the dollar sign, $,
or as USD or US$ to distinguish it from other dollar-denominated
currencies and from others that use the $ symbol. It is divided into
100 cents (200 half-cents prior to 1857).Taken over by the Congress
of the Confederation of the United States on July 6, 1785, the U.S.
dollar is the currency most used in international transactions.
Although U.S. dollar is a fiat currency, several countries use it as
their official currency, and in many others it is the de facto
currency.
We have seen dollar as a universal currency in the market. Across
world, dollar is the one currency which have been using by each
and every country for trading purpose. From 1972 onwards, it is
kind of fundamental requirement for any country to have food forex
reserve in terms of dollar. Sometimes analysts assume that 71% of
the dollar has been consumed or reserved by other countries. From
last three decades, OPEC countries also demanding dollar for oil
bills so this was one major reason behind maintaining forex reserve
by other countries.
Though dollar has been using by so many countries but from last
three decades, dollar loosen their value continuously and earlier in
1972, we have one dollar which is now around 30 cents so dollar
lost 70% of their original value. It was happen due to highest fiscal
deficit in US. They are printing money like anything and at the end
of the day dollar lost their original value.

Dollar valuation
Dollar is a currency which has been using in the world. US believed that if
they print dollar without concern about their fiscal condition then it is
obvious that it hurts their financial health.

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US is a country who has been facing high fiscal deficit and its eroding value
of the dollar. If we can count the value of dollar is 30 cents.

Factor affecting dollar

• US high fiscal deficit
• US govt. policy
• LIBOR interest rates

Research
problem
Understanding the correlation among commodities would enable to
understand the movement of their prices and that would help to analyze and
make prediction of many economic indicators of our country.

A Research report on relationship among gold, oil and dollar. Their impact on
Indian economy.

2.1 Objectives
To find correlation among different commodities including:

a) Correlation between gold and oil

b) Correlation between oil and dollar
c) Correlation between gold and dollar
d) To find the factors responsible for the correlation
e) To analyze the effect on economy as a whole(Indian economy)

2.2 Methodology for research

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a) Type of research – Exploratory Research
b) Data source – secondary data source(last 3 year daily spot prices)
c) Data collection tool- websites
d) Data analysis and interpretation using statistical tools

2.3 Analysis and interpretation

Correlation analysis(r)

Correlation measures the closeness of relationship between two variables,

more exactly of the closeness of linear relationship.

When the relationship is of quantitative nature the appropriate statistical tool

for discovering and measuring the relationship and expressing it in a brief
formula is known as correlation.

If two or more quantities vary in sympathy, so that movements in the one

trend to be accompanied by corresponding movements in the others then
they are said to be correlated.

Importance of correlation

1. The correlation coefficient helps in measuring the extent of

relationship between two variables in one figure only.
2. If two variables are closely related, we can estimate the value of one
variable given the value of another variable. This is done with the help
of regression equation.
3. Correlation facilitates decision-making in business organizations.
Expectations about the behavior of certain variables are also based on
correlation analysis.

Regression analysis

Regression means stepping back towards the average. In statistics

regression analysis is applicable to all those fields where two or more related
variables have the tendency to go back to the mean.

Regression is the measure of average relationship between two or more

variables in terms of the original units of data.

The chief objective of regression analysis is to know the nature of

relationship between two variables and to use it for predicting the most likely

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value of the dependent variable corresponding to a given known value of the
independent variable.

Difference between regression and correlation

The correlation coefficient is merely concerned with determining how

strongly (or closely) two variables are linearly related. It is not capable of
solving prediction problems. Prediction problems are solved by regression
methods.

Correlation precedes regression because if the relationship between the

variables is not sufficiently strong, there would appear no sound basis for
prediction.

2.4 Limitation of the study:

a) Lack of experience on conducting such research
b) Time frame was not enough to cover all the data which would have
resulted in a better outcome.

Analysis and
interpretation
1. Relationship between Gold and oil

Gold and oil tracked each other through 2007 and part of 2008, before
oil started to
Outperform. Now gold is leading. Through most of 2006, 2007 and
early 2008, commodities were ascendant, led by crude oil and gold. Oil
started to run ahead of gold in mid-2008, but the roles have reversed.

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What this ratio signifies is another potential reason for worry. One ratio
analysts look at is the ratio of gold prices to oil prices to determine
where the economy might be headed. Often, this ratio is steady in
strong economic times. When oil begins to do better,
outperforming gold, the ratio falls, emblematic of very strong
growth, but also supply shocks or inflation concerns. At some point,
this ratio ends up hitting a bottom. Then, gold starts to outperform,
and the ratio increases, and with it, a signal that a recession is in
progress or on the Way. Over the last 37 years, this ratio has had a
monthly average of 13, that is, gold’s price in dollars is 13 times
the price of oil.

In below chart, it’s visible that oil prices follow gold prices and
sometimes gold prices following oil prices. Now, data shows that when
economy doing well and things are not well then oil prices is go out of
control and gold is follow oil and gold become lagging factor for
commodity platform. When economy getting worse at that point of
time oil is the commodity which is going to badly hit by this situation
and gold is the one commodity which drive whole market and become
leading factor for oil space.

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SUMMARY OUTPUT

Regression Statistics
Multiple R 0.488942025
RSquare 0.239064303
Adjusted RSquare 0.238662754
Standard Error 796.2841853
Observations 1897

ANOVA
df SS MS F Significance F
Regression 1 377495840.2 3.77E+08 595.355 1.4135E-114
Residual 1895 1201559814 634068.5
Total 1896 1579055655

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 1121.204946 90.13320825 12.43942 3.32E-34 944.4342038 1297.976 944.4342038 1297.975689
gold prices 0.217081353 0.008896814 24.3999 1.4E-114 0.199632773 0.23453 0.199632773 0.234529932

Correlation and regression analysis

From above summary, we can reach to some conclusion.

Coefficient of correlation(r) = 0.488(positive)

Coefficient of determination (r2) = 0.2390

It means when gold prices move upward or downward, there are 50% chances of
where oil will also follow same pattern. It is positively correlate with gold/oil. Both
commodities following each other’s trend in pricing.

From regression analysis, we can predict gold prices from the oil prices and
coefficient of determination of this regression analysis is 0.2390.

Whenever oil prices moving upward side then gold also following this trend and you
can predict the prices of gold and make your portfolio investment strategy. This
relationship is very important to know and from this relationship you can make your
investment strategy in commodity area.

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2. Relationship between Gold and dollar

This is a relationship between gold and dollar. Though it is not

apparently but it is there. Sometime it’s evident from chart that it does
behave completely opposite in terms of movement. When dollar go up
and down and gold follow this trend in opposite direction.

From chart, it is clearly visible that from 2004 to 2008 gold prices and
dollar rate (exchange rate). Behaving in opposite direction but after
2008, the scenario has been changed. There are various reasons
behind it but dollar exchange rate against rupee plays vital role in last
one year relationship.

In last one year, we have seen dollar became weak against major
currencies of the world. In case of rupee, dollar has been taking very
strong position. From last one year, we have seen tremendous
fluctuation in dollar exchange rate in terms of rupee.

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SUMMARY OUTPUT

Regression Statistics
Multiple R 0.452726446
R Square 0.204961234
Adjusted R Square 0.204541689
Standard Error 1833.255984
Observations 1897

ANOVA
df SS MS F Significance F
Regression 1 1641870349 1.64E+09 488.5316 1.67601E-96
Residual 1895 6368768118 3360828
Total 1896 8010638468

Coefficients Standard Error t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Intercept 24878.43057 678.0595101 36.69063 3.9E-223 23548.60902 26208.25213 23548.60902 26208.25213
dollar -331.9898562 15.02029615 -22.1028 1.68E-96 -361.44791 -302.5318023 -361.44791 -302.5318023

Correlation and regression analysis

From above summary, we can reach to some conclusion.

Coefficient of correlation(r) = 0.4527(negative)

Coefficient of determination (r2) = 0.2049

We have seen negative correlation between dollar and gold prices which is
approx. 45% so when dollar is become stronger against rupee at that point
of time gold prices going down which was happen in past i.e. 2006-2008. In
2009, due to various reasons dollar got weaken against world’s major
currencies so when dollar got weaken means gold prices going to be high so
in this case it’s true. In other word, dollar became strong against rupee so
data would not been able to give clear picture.

From negative correlation, it is evident that both dollar and gold moving in
opposite direction from each other.

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3. Relationship between Oil and dollar

We have a relationship between oil and dollar. When oil prices went
beyond limit then everybody talking about dollar. We have data of last
5 years from which we are trying to find out the exact relationship
between oil and dollar prices. There is a some cause-effect relationship
between them but it is very difficult to say who is leading and lagging.

We know that you can buy oil through dollar only and except dollar you
could not pay your oil import bills so dollar does have a significant
impact on oil prices but there are some other factors which also plays
very important role on oil pricing.

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.726203959
R Square 0.52737219
Adjusted R Square 0.527122782
Standard Error 627.5578227
Observations 1897

ANOVA
df SS MS F Significance F
Regression 1 832750039.2 832750039.22114.497455 0
Residual 1895 746305615.5 393828.8208
Total 1896 1579055655

Coefficients Standard Error t Stat P-value Lower 95%Upper 95% Lower 95.0%Upper 95.0%
Intercept 13927.526 232.1124565 60.00335444 0 13472.3 14382.7488 13472.3032 14382.7488
dollar -236.4355164 5.141728393-45.98366508 0 -246.52 -226.3514734-246.5195594-226.3514734

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Correlation and regression analysis

From above summary, we can reach to some conclusion.

Coefficient of correlation(r) = 0.7262(negative)

Coefficient of determination (r2) = 0.5273

We have a data of correlation means very high correlation and it’s

negative so dollar prices and oil move opposite to each other. From
last two years, we have seen this relationship between dollar prices
and oil prices.

If you want to predict oil prices then you have to check dollar prices. If
dollar prices goes up then it affect oil prices also. It depends on analyst
how can you take it. Many analysts believed that it’s quite confusing
that who is lagging or leading indicator in case of oil prices and dollar
prices.

Crude oil, Dollar and Gold: The

Inseparable Triplets
Gold is primarily a monetary asset and used all over the world in the same
manner. Whenever the world’s major economics are under recession and
major currencies weaken, people will shift from the major currencies to gold
as a safe mode of investment and as wealth to trade internationally.

Normally, crude oil and gold show co-movement. If the prices of crude oil
increase, it will push the prices of gold and vice-versa. With respect to dollar,
the gold price moves in the opposite direction. According to the analysis, it is
found that the gold and crude oil prices positively correlated, but dollar and
gold is negatively correlated. This happens as an increase an oil prices
results in inflation. If we look at the core inflation in India, the level of
inflation has been significantly increases due to oil only.

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Crude oil, from November 20 actually plunged 11 per cent, taking the
opposite direction to gold prices. These trends are at variance with the
historic movements in gold prices. Traditionally, prices of gold have moved
hand in hand with crude oil, as gold is considered an inflation hedge.
Similarly, gold has usually risen when stocks have performed badly;
as gold is viewed as a substitute for risky assets like stocks. Gold prices have
usually firmed up in the midst of severe stock market corrections. Take for
example September 2001 (9/11), when markets worldwide experienced
turmoil.
Ironical, isn’t it, that gold should be the best performing commodity in a year
when crude oil turned out to be the worst? After all, gold prices have
historically marched in-step with crude oil. Remember that gold attained its
previous record of $850 an ounce during the oil crisis of the eighties. In
2008, gold prices (in dollar terms) have gained 6 per cent while crude oil has
lost 62 per cent.
More than inflation fears, it is the gyrations of the US dollar that have been
the biggest influence on gold prices this year. Between January and April, the
yellow metal rose 12 per cent, as dollar was depreciating. With
the dollar taking a u-turn from June, gold erased much of these gains and
turned volatile. Over the last month, as more global economies grapple with
a slowdown or recession, gold has been on the path to recovery. Mounting
fiscal and trade deficits for the United States and fear of a deepening
recession (negative signs for the dollar) are all positive for gold.
The unprecedented surge in commodity prices led by crude oil that flagged
off in mid-2007 came to an abrupt halt in mid-2008, after the curtains went
down on the Chinese Olympics. The commodity barometer- the CRB Spot
Index, rose 50 per cent from January to peak in July only to fall precipitously
thereafter. What began as an unwinding of speculative positions in response
to lower Chinese demand quickly turned into carnage in commodities, as the
spectral of global recession took shape.
After the reams written about the “peak oil” theory, who would have thought
crude oil would be the worst performer in the commodities basket in 2008?
Currently trading at $39 a barrel, oil has lost 62 per cent over the
year. Oil rose sharply between January and July and peaked at $147,
accompanied by much hype and speculative build-up. Prices took a tumble
after a steep slowdown in demand became evident and the US, followed by
UK and Japan slipped into recession. Production cuts from OPEC and a revival
in demand as prices fall, may be vital, to revive the prices for Black Gold.
However, even at $39 a barrel, no one is sure about whether oil prices have
bottomed out.

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Impact on
Inflation
Inflation will negatively affect the global economies, particularly oil-
dependent economies such as the India. It is estimated that a $10 per barrel
increases in crude oil price results in a decline of 1% of global GDP. Apart
from increased transportation, heating and utility cost, higher oil prices are
eventually reflected in virtually every finished product, as well as food and
commodities in general. Therefore, inflation attracts the investors towards
investing in gold, as it is used as a tool to hedge against inflation.

Our Indian economy has more dependency on oil imports from OPEC
countries. Oil prices give significant impact on Indian impact. Moreover, we
need foreign exchange for oil import bill and other side, exports revenue has
been generated by oil products. Because of this dependency on both oil and
foreign suppliers, any increase in price or supply disruptions will negatively
influence the Indian economy to a greater degree than any other nation.

Last two year data from May 2006 to 2008 provides a clear indication about
the relationship between crude oil prices, inflation and dollar exchange rate

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against euro and effect of all these factors on the gold price. During the last
one year on a day-to-day basis, the price of gold has shown a -0.8 degree of
correlation with the US dollar exchange rate against rupees. In year 2006,
the crude oil prices were moving in the range of $65/barrel to $150/barrel
and even more than that, the pressure of the crude oil prices was seen on
the US dollar exchange rate with a high inflation rate that was reached to
12% in mid of 2008.

In 2006 when the dollar was strong, gold was traded at lower prices in
comparison to the months when the dollar showed weakness against the
rupee. Some important fluctuation shown when dollar was strong against
rupee on particular date gold was traded on $571/ ounce. But as soon as
rupee strengthened, gold started upward movement but since last six
month, we have seen some changes in this pattern.

The gain in gold prices was not just because of the weakening of dollar but
supported by the total supply and demand, expectation of rising interest
rates by RBI and some geopolitical factors also. Like by the end of June 2007,
the concern among investors that inflation which is led to a small surge on
the price of gold in the world markets. Although the gains are less than one
percent and differ from market to market, political unrest has historically led
to soaring gold prices. Following the September 11,2001 terrorists attacks,
gold prices surged by over 5%. The precious metal is often seen as a safe
bet in turbulent times. However, weakening of the dollar was one of the most
important reasons. Increases in volatility and depreciation in dollar created in
havoc in investors’ mind and forced them to go for alternative assets such as
either gold or currency.

Future movements of
triplets: G.O.D
The price of oil is poised to rise steadily as the supply/demand
imbalance increase and the dollar declines, even if there are no supply
disruptions, terrorist threats or geopolitical concerns to consider. As
this happens, the price of precious metals will climb until they
eventually catch up to their historic ratios. If oil producers and other
foreign US dollar holders begin to sell the trillions they hold and
diversify into alternatives, then the price of both oil and precious
metals will rise to levels that are hard to imagine today.

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So it is very important to note that the relationship between crude oil,
dollar and gold will exist in the same manner. The effect will not be the
same and the correlation between gold and dollar may decline ten
years down the line. Likewise, instead of dollar the crude oil once
starts quoting in euro and some more currencies get added to the
portfolio, the availability of alternatives will ease the burden on gold
and investors may go for other alternatives. So, the diversification will
affect the relationship, but in case if some geopolitical and world
inflation creates havoc, the same relationship will exist and gold will be
assumed to be safer for investment.

Despite the bullish undertone relating to the pricing of gold in June

2007, it is not expected that the same trend will persist for a longer
period, but it can be said that the scenario will be the same for a
shorter period. It is not expected that the US economy will show much
signs of weakness for the coming period. In case of the crude oil prices,
we are in for a volatile period with a fall in the housing sector in the US
taking centre stage. Given the scenario, the US economy would not
spin out of control just because of one over inflated sector. As far as it
is concerned about the interest rates, American interest rates are still
relatively low when looked at historically.

However, there is still plenty of liquidity around to encourage growth,

which would mean that in spite of “decoupling” of the dollar and gold
that is happening in the recent past, it might not result in complete
absence of co-movement, but would only weaken the link in the long-
run. Until then, the triplets would move in tandem.

Findings
We have certain objective which needs to be fulfilled and we have some
findings:

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1. Relationship between Gold and oil

Coefficient of correlation(r) = 0.488(positive)

Coefficient of determination (r2) = 0.2390

2. Relationship between Gold and dollar

Coefficient of correlation(r) = 0.4527(negative)

Coefficient of determination (r2) = 0.2049

3. Relationship between Oil and dollar

Coefficient of correlation(r) = 0.7262(negative)

Coefficient of determination (r2) = 0.5273

Conclusion

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We have findings and we have some suggestion regarding this. We

have positive relationship between gold and oil. From this relationship, we
can predict some future movement between them. Though, here we would
not been able to find lagging and leading indicator. There are some
relationships among these triplets. We have negative relationship between
gold and dollar. It means gold and dollar move in opposite direction. From
last two years, we have relationship between oil and dollar. From last few
years, we have not been able to find out any lagging and leading indicator.
There is one significant relationship between oil and dollar which shows that
oil prices more emphasis on dollar fluctuation. There are more factors which
affect all these relationships but we have not covered that portion. We found
some relationship which will be utilized for prediction.

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Bibliography

1. www.mcxindia.com
2. www.nseindia.com
3. www.investopedia.com
4. “Business statistics with managerial applications” – B.M.Aggarwal
5. www.rbi.org.in

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