INTERNATIONAL INSTITUTEOF PROFESSIONAL STUDIES, DAVV

INDORE

MBA (MS2YR)FINAL SUBMMITION OF (MRP)

FLUCTUATION IMPACT OF GOLD AND SILVER PRICE ON INDIAN CURRENCY

SUBMITTED TO: SUBMITTED BY:

Dr.Sujata parwani Shaivya shrivastav

FT2K12-44

MBA(ms2year4th sem)

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ACKNOWLEDGEMENT

The path toward completion of an internship is hard and often times can seem quite difficult. It has been an enriching and rewarding experience for me both professionally as well as personally. I would like to express my thanks and appreciation to the many that have encouraged and lifted my feelings along the way.

I would also like to thank Dr. Sujata parwani(iips),my project mentors who helped me a lot during my internship program.I am sure the immense learning that I have had from this project would help me stand in good stead in the future.

I extend my heartiest thanks to all those persons whose willing cooperation led to the timely completion of the project. Also I would like to thank all those who have helped me directly or indirectly in completing the project.

In completing this study, I did my level best correcting my shortcomings to possible extent and I sincerely hope that this report will serve its purpose.

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PREFACE

I was highly obliged to be presented with the golden opportunity of working with IIPS. A company having huge infrastructure and networking.

My MRP titled “FLUCTUATION IMPACT OF GOLD ANDSILVER PRICE ON INDIAN CURRENCY” was undertaken for a period of one semsters.

In the first chapter titled “introduction of risk management and sbi bank”, I have tried to give a brief introduction of risk management which provide financial

assistance to msme.

Although the project was compiled and completed using limited resources,I would be highly obliged if this proves beneficial to you.

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CERTIFICATE

This is to certify that shaivya shrivastav student of iips (davv), Indore of mba (full time) program has prepared major research mrp report on topic “FLUCTUATION IMPCT OF GOLD ANDSILVER PRICE ON INDIAN CURRENCY” under my guidance.

Guide name & designation

Dr. Sujata parwani

IIPS(DAVV)

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STUDENT DECLARATION

This is to certify that, shaivya shrivastav student of mba iips (davv), Indore program has prepared major research MRP report on topic “FLUCTUATION IMPCT OF GOLD ANDSILVER PRICE ON INDIAN CURRENCY” under my guidance.

The research as per my knowledge the original and genuine and not published in any research journal previously

Shaivya shrivastav

(MBA 3rdSEM)

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INDEX

serial no.

Topic of mrp Page no.

1 Abstract 08

2 Introduction 09

2 Literature review 23

3 Objective & research question 28

4 Methodology 32

5 Data analysis 33

6 Rationale of the studies 36

8 Conclusion of the study 38

9 Reference 41

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RESEARCH TOPICFLUCTUATION OF GOLD ANDSILVER PRICE IMPACT ON

INDIAN CURRENCY

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ABSRACT

The loves of Indians for gold is timeless. the gold has a special significance in all ages . the importance of gold can be understood from the saying “ ALL THAT GLITTERS IS NOT GOLD” in India people by gold not only occasions like weddings, festivals, or special events but also any time and every time. gold and silver offered to Indian deities .

The Hindu calendar also has some special days like dhanteras, akshayatritiya, dussera to buy gold and silver.

But are the growing prices of gold breaking up the love affair of Indians for gold and silver??

This project concentrate on the importance of gold and silver in Indian currency changing trends in the gold and silver prices over a period, factors, influencing the fluctuations in gold and silver prices and the effect of the change in gold and silver prices on the Indian economy..

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INTRODUCTION

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What is “Commodity”?Any product that can be used for commerce or an article of commerce which is traded on anauthorized commodity exchange is known as commodity. The article should be movable of value, something which is bought or sold and which is produced or used as the subject or barter or sale. In short commodity includes all kinds of goods. Indian Forward Contracts (Regulation)Act (FCRA), 1952 defines “goods” as “every kind of movable property other than actionableclaims, money and securities”. In current situation, all goods and products of agricultural(including plantation), mineralandfossilorigin are allowed for commodity trading recognized under the FCRA. The nationalcommodity exchanges, recognized by the Central Government, permits commodities whichinclude precious (gold and silver) and non-ferrous metals, cereals and pulses, ginned and un-ginned cotton, oilseeds, oils and oilcakes, raw jute and jute goods, sugar and gur, potatoes andonions, coffee and tea, rubber and spices. Etc.Benefits of Commodity Futures Markets:-1.Price Discovery:-Based on inputs regarding specific market information, the demandand supply equilibrium, weather forecasts, expert views and comments, inflation rates,Government policies, market dynamics, hopes and fears, buyers and sellers conducttrading at futures exchanges. This transforms in to continuous price discovery xxvimechanism. The execution of trade between buyers and sellers leads to assessment of fair value of a particular commodity that is immediately disseminated on the trading terminal.

2.Price Risk Management: -Hedging is the most common method of price risk management. It is strategy of offering price risk that is inherent in spot market by takingan equal but opposite position in the futures market. Futures markets are used as a mode by hedgers to protect their business from adverse price change. This could dent the profitability of their business. Hedging benefits who are involved in trading of commodities like farmers, processors, merchandisers, manufacturers, exporters, importersetc.3.Import- Export competitiveness: -The exporters can hedge their price risk andimprove their competitiveness by making use of futures market. A majority of traderswhich are involved in physical trade internationally intend to buy forwards. The purchases made from the physical market might expose them to the risk of price risk resulting to losses. The existence of futures market would allow the exporters to hedgetheir proposed purchase by temporarily substituting for actual purchase till the time isripe to buy in physical market. In the absence of futures market it will be meticulous,time consuming and costly physical transactions.4.Predictable Pricing: -The demand for certain commodities is highly price elastic. Themanufacturers have to ensure that the prices should be stable in order to protect their market share with the free entry of imports. Futures contracts will enable predictability indomestic prices. The manufacturers can, as a result, smooth out the influence of changesin their input prices very easily. With no futures market, the manufacturer can be caught between severe short-term price movements of oils and necessity to maintain pricestability, which could only be possible through sufficient financial reserves that couldotherwise be utilized for making other profitable investments.

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 5.Benefits for farmers/Agriculturalists:- Price instability has a direct bearing on farmersin the absence of futures market. There would be no need to have large reserves to cover against unfavorable price fluctuations. This would reduce the risk premiums associatedwith the marketing or processing margins enabling more returns on produce. Storing xxviimore and being more active in the markets. The price information accessible to thefarmers determines the extent to which traders/processors increase price to them. Sinceone of the objectives of futures exchange is to make available these prices as faras possible, it is very likely to benefit the farmers. Also, due to the time lag between planning and production, the market-determined price information disseminated byfutures exchanges would be crucial for their production decisions.

6.Credit accessibility: -The absence of proper risk management tools would attract themarketing and processing of commodities to high-risk exposure making it risky businessactivity to fund. Even a small movement in prices can eat up a huge proportion of capitalowned by traders, at times making it virtually impossible to pay back the loan. There is ahigh degree of reluctance among banks to fund commodity traders, especially those whodo not manage price risks. If in case they do, the interest rate is likely to be high andterms and conditions very stringent. This posses a huge obstacle in the smoothfunctioning and competition of commodities market. Hedging, which is possible throughfutures markets, would cut down the discount rate in commodity lending.7.Improved product quality:- The existence of warehouses for facilitating delivery withgrading facilities along with other related benefits provides a very strong reason toupgrade and enhance the quality of the commodity to grade that is acceptable by theexchange. It ensures uniform standardization of commodity trade, including the terms of quality standard: the quality certificates that are issued by the exchange-certifiedwarehouses have the potential to become the norm for physical trade.

History of goldInternational monetary system - gold or silver as a means of exchange. Gold is one of the most valuable economic indicators. Gold’s price elasticity is negative. Rising gold prices can change destiny of many unprofitable mines and turn them into a very successful business. Gold is a safe investment.Gold prices have been determined more by landed costs and by the rupee-dollar exchange rate. Factors affecting gold price fluctuation Currency Inflation: When the supply of currency is inflated, the price of gold increases as the per-unit value of the currency declines. During times of monetary contraction (i.e. when currency is “soaked up”), the price of gold goes down.

Gold is a chemical element with the symbol Au and atomic number 79. It is a dense, soft, malleable

and ductile metal with a bright yellow color and luster, the properties of which remain without Gold

has long been considered one of the most precious metals, and its value has been used as the

standard for many currencies (known as the gold standard) in history. Gold has been used as a

symbol for purity, value, royalty, and particularly roles that combine these properties. It is used

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in international transactions. Gold consumption observed a sharp acceleration during the 1990s

amidst liberalization of gold import policy, strong economic growth and favorable movements in

gold prices. Gold is now being used as an alternative for dollar since its collapse (Turk and

Rubino, 2008). Monetary and Non-Monetary demand for gold is steeply rising. It has been

demanded by individual buyer, institutional buyer as well as he Countries too. There has been

drastic increase in the prices of gold since 2001. Gold prices have been increased by 900%

during last 10 years. Traditionally gold has been a safe investment option in India, but its role

has changed with the time. Gold is now being traded and forecasted as a commodity (Greely &

Currie, 2008). Gold has entered in to secular bull market, since than the prices are on rise. Gold

unlike any other commodity has been constantly providing plenty yield to its investors. As in

India, gold has been traditionally used in jewelry, but it was long thought as an invest option by

ancestors also hedging financial risks. Krauth (2011) in his report has clearly mentioned that the

demand for the gold will rise and will surpass $ 2500/oz in coming days. This will also impact

the prices of gold in India too. It is believed that gold prices will steeply rise in coming period of

time. The role of gold in investment has drawn more attention since this transformational

economic crisis began to unfold in 2008 (Fei&Adibe, 2010).

The paper focuses and studies various factors that are attributing towards the increase in its price

with special reference to India. The gold prices in India have shot up more than 900% in past 10

years, and continue to rise. The results reported in this paper indicate how monetary and non

monetary factors are contributing towards increase in gold prices and also how it would affect

Indian economy.

The purpose of this paper is to examine the causes, resulting in increase in gold prices. This

study also investigates the effects of international business environment, political environment,

market conditions, its induction in commodity market, buying behavior of consumers, and

inflation on gold prices with special reference to India (between 2002-2012).

Gold resists attacks by individual acids, but it can be dissolved by aqua regia (nitro-hydrochloric acid), so named because it dissolves gold. Gold also dissolves in alkaline solutions of cyanide, which have been used in mining. It dissolves in mercury, forming amalgamalloys; it is insoluble

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in nitricacid, which dissolves silver and base metals, a property that has long been used to confirm the presence of gold in items, giving rise to the term acid test.

This metal has been a valuable and highly sought-after precious metal for coinage, jewelry, and other arts since long before the beginning of recorded history. In the past, the Gold standard has been implemented as a monetary policy, but it was widely supplanted by fiat currency starting in the 1930s. The last gold certificate and gold coin currencies were issued in the U.S. in 1932. In Europe, most countries left the gold standard with the start of WorldWar I in 1914 and, with huge war debts, did not return to gold as a medium of exchange. The value of gold is rooted in its medium rarity, easily handling, easy smelting, non-corrosiveness, distinct colour and non-reactiveness to other elements; qualities most other metals lack.

A total of 174,100 tonnes of gold have been mined in human history, according to GFMS as of 2012.[2] This is roughly equivalent to 5.6 billion troy ounces or, in terms of volume, about 9261 m3, or a cube 21.0 m on a side. The world consumption of new gold produced is about 50% in jewelry, 40% in investments, and 10% in industry.[3]

Besides its widespread monetary and symbolic functions, gold has many practical uses in dentistry, electronics, and other fields. Its high malleability, ductility, resistance to corrosion and most other chemical reactions, and conductivity of electricity have led to many uses, including electric wiring, colored-glass production, and gold leafing.

Most of the Earth's gold probably lies at its core, the metal's high density having made it sink there in the planet's youth. Virtually all discovered gold is considered to have been deposited later by meteorites that contained the element.

The uses of gold are wide-ranging and well-documented. In addition to its value as an investment, the physicalappearance and properties of gold lend themselves to its use in jewellery and for varioustechnological/manufacturing uses. For example, in many developing countries, gold jewellery is not onlyperceived as an adornment but also as an effective savings vehicle. Its unique properties make it a key input inthe manufacture of electronic goods and telecommunications devices, health care and dental equipment,nanotechnology and high-tech engineering.Global gold demand rose by around 42% between 2007 and 2012, peaking in 2011 at 4,582 tonnes. Thebreakdown of global gold demand in 2012, which is shown in Figure 6, contains four key elements:Central bank purchases which account for 12% of demand;Investment demand (which consists of total bar and coin and gold-backed ETFs and similar products46);Jewellery which accounts for the largest proportion of gold demand; andTechnology/manufacturing, which includes uses such as in electronics and dentistry, accounts for around10% of gold demand.The rest of this section considers each of these uses in turn

Analysis of gold Price Movement

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After posting the 1-year chart for gold shown below on clivemaund.com a couple of days ago, a subscriber wrote and protested, saying how could I recommend buying the sector when it hasn't even completed the H&S pattern, which could abort, and that it would be far better to wait for a breakout, and then buy on a post breakout pullback. There are 2 points I would like to make about this. The first is that if we can be pretty sure this H&S pattern is valid, then why wait until gold is $100 higher to buy? The second point is that because we have clearly defined support right beneath the current price, we thus have an excellent risk/reward ratio, because we have the option of placing stops beneath this support. If the interpretation that this H&S bottom is valid, then gold is going a lot higher from here, and we will be in for most of the ride, if incorrect, we are out for a trivial loss. The experienced pure trader will instantly recognize this as an acceptable and attractive setup. The fact that a lot of investors are moaning about how awful the PM sector is and how they have no confidence that it will ever perform again is great to hear, because this is just the mood we expect to prevail at an important market bottom.

Factors Affecting Volatility of gold price Prices

Essentially the price of gold is determined by:1) Supply2) Demand for use in goods such as jewellery3) Speculative demand to hedge against inflation and economic uncertainty.

Markets like India have strong demand for using gold in jewellery. Economic growth in India increases disposable income and therefore demand for gold. As gold is a luxury good (income elasticity of demand > 1) then a rise in income in India could lead to a bigger % demand for gold.

Investment

Gold is seen as desirable element in an investment portfolio. Gold will hold its value even during inflation. At various times, investment trusts and individuals will have a greater demand for saving their wealth in the form of gold. This can lead to higher demand for gold to store wealth. This investment demand is the primary factor behind the increase in price of gold between 2006 and 2011.

Inflation Prospects.

With inflation of 0%, money retains its value. However, if inflation increases to 20%, then money (notes and coins) will reduce in value. If inflation is very high, then money can soon lose all its value. Therefore in periods of high inflation, people will seek to switch out of cash and into physical assets which retain their value. The most important inflation proof investment is seen as gold.

Note, it also depends on the real interest rate. If inflation is 6%, but interest rates are 8%, you can still protect the value of your savings in a bank. However, if you get a situation of high and volatile inflation, you are more likely to have negative real interest rates. A key issue is whether market fear inflation could get out of control.

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Gold Reserves

Central banks usually keep some of their reserves in gold. Gold doesn’t give any interest so Central banks may prefer bonds which give some interest. But, if they decide to hold more reserves in gold, demand and price will rise. Recently, China and Russia have indicated they will seek to hold more reserves in gold. Part of this may be due to China becoming more concerned about the value of its dollar assets.

Lack of Safe Havens

If the dollar is predicted to fall because of inflation or debt fears, investors may seek for other currencies (popular targets have included Swiss Franc and Japanese yen). However, in times of economic stagnation, countries like Japan and Switzerland are likely to try and prevent their currencies appreciate too much (makes their exports less competitive). At the moment, there are no obvious currencies to invest in. The Eurozone has great problems, the UK is weak. No-one really wants a strong currency at the moment. Therefore, as an alternative to investing in a currency, investors may buy gold.

US Government Borrowing

The level of US government borrowing can have an impact on the price of gold. If markets feel the US debt is projected to get out of control, there is a greater chance that the dollar will devalue and dollar assets will fall. This means people may sell dollar assets (e.g. US treasury bills) and buy gold instead.

Monetary Policy / Quantitative Easing

Quantitative easing involves increasing the money supply. This raises prospect of higher inflation in the future. As it happens, quantitative easing hasn’t caused inflation, the increase in bank reserves have largely been saved. But, if large economies like the US and EU engage in quantitative easing (which to some extent is untried) , investors are more likely to favour gold as it gives greater security in times of unorthodox monetary policy.

Gold vs Stock Market

Gold is often seen as an alternative to the stock market. Buying shares can give a higher return because investors receive dividends and possible growth in share capital. However, in times of economic turmoil or recession, the value of shares tends to fall. Therefore investors may sell shares and buy gold instead. Thus fears over a recession tend to increase the value of gold as people move from more risky stock market to gold.

Speculation.

Like any commodity, investors can be caught up in the mood and expectations of the moment. Rising gold prices can become self-fulfilling as investors pile into gold to take advantage of rising prices. The price of gold can be highly volatile. Some argue we are in a gold bubble, when the economy returns to

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normal people may feel gold is highly overvalued and we could see a fall in the price of gold like the early 1980s.

How inflation affects GOLD rates.

Indians love Gold and research says the highest amount of gold sales happen in India.

India is filled with different festivals and many traditions and for these occasions in India like weddings, engagements, etc, families always give gold as gifts. Many people go shopping for gold immediately when the rates are low.

The question that arises is how to make gold a profitable element when rates are high and people are unwilling to buy. Gold is an asset and the prices are bound to fluctuate. People keep their gold on mortgage and take loans against gold which in turn leads to the fluctuation of gold rates. Gold rates have been drastically dropping since November 2012 and this has indeed disturbed the entire market. There are many factors that affect gold rates and who can tell what's to come in future; a drop or rise? The fall in gold prices of 13% since April 11 was the biggest two-session decline since 1980. So here is why gold rates are crashing. One of the most important factors i.e. global inflation is falling, which in turn is reducing the value of gold as a hedge against rising prices. According to research, global inflation peaked at 4 percent in 2011 and has fallen steadily since then. Global prices in February 2013 were up only about 2.5 percent from the previous year.

What is the future that gold holds?

In the worst possible scenario, this year, the downside for gold price is capped at $1150 (Rs 20,000-Rs 21,500). One should also watch out for crucial levels of $1330 and $1250.

Gold prices could correct in future as the global macro environment improves. It could fall towards $1100-$1180 level in the international market and around Rs 22000-24000 in the domestic market depending on the levels of rupee says Kishore Narne (Associate Director Head - Commodity Currency), MotilalOswal Commodities. Will you invest in shares and mutual funds instead of gold due to the drop in its rate,

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SilverSilver is a chemical element with the chemical symbol Ag (Greek: άργυρος árguros, Latin: argentum, both from the European root *arg- for "grey" or "shining") and atomic number 47. A soft, white, lustrous transition metal, it possesses the highest electrical conductivity of any element and the highest thermal conductivity of any metal. The metal occurs naturally in its pure, free form (native silver), as an alloy with gold and other metals, and in minerals such as argentite and chlorargyrite. Most silver is produced as a byproduct of copper, gold, lead, and zinc refining.

Silver has long been valued as a precious metal, used in currency coins, to make ornaments, jewelry, high-value tableware and utensils (hence the term silverware) and as an investment in the forms of coins and bullion. Silver metal is used industrially in electrical contacts and conductors, in mirrors and in catalysis of chemical reactions. Its compounds are used in photographic film and dilute silver nitrate solutions and other silver compounds are used as disinfectants and microbiocides (oligodynamic effect). While many medical antimicrobial uses of silver have been supplanted by antibiotics, further research into clinical potential continues.

Factors Affecting Volatility of Silver Prices

The price of silver has been very volatile historically. Although the ratio of gold to silver prices has varied over the past, in recent times we observe that silver prices follow gold prices and may act as a substitute for them in the future. This article tries to identify the major factors that cause volatility in the silver prices and analyse in detail the impact of these factors on the silver prices. The study aims to provide directional inputs that can help predict future trends in the silver prices. Silver is one of the most precious metals, valued both as a form of currency and store of value. The major components of silver demand1 are Industrial use (54%), Photography (15%), Jewellery and Silverware (26%) and Coins (5%). Twenty countries together produce 96% of the silver mined globally2. Mexico is the largest producer followed closely by Peru3. The main consumer countries for silver are the US, India, Canada, Mexico, UK, France, Germany, Italy and Japan. The key factors that affect the volatility of silver are fluctuating industrial demand and store of value demand, geo-political uncertainties, rising crude oil prices, depreciating dollar, government policies on major export and import destinations, sales by China and other central banks, direction of gold prices and direction of other commodity prices.

Factors Affecting Silver Prices

We have, in our research, tried to identify the most important factors that cause fluctuations in silver prices. We also tried to understand how their change impacts silver prices.

Large and Private Institutional Investors

Other than the most influential impact of the Hunt Brothers, in 1997, Warren Buffett purchased 130 million troy ounces (4,000 metric tons) of silver at approximately $4.50 per troy ounce (total value $585 million). Also, in April 2006, iShares launched a silver exchange-traded fund, called

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the iShares Silver Trust which as of April 2008 held 180 million Oz silver as reserves6. This clearly indicates that large investors have the power to affect market prices.

Large Concentrated Short Position

CFTC reported that four or fewer largest traders are holding 90% of all short silver contracts7. They were short by 245 million troy ounces (as of April 2007), which is equivalent to 140 days of production.

Industrial Demand

New applications for silver are being explored in batteries, superconductors and microcircuits, which may further increase non-investment demand. The expansion of the middle classes in emerging economies aspiring to Western lifestyles and products may also contribute to a long-term rise in industrial usage. Moreover, retail investors’ strong interest in ETFs helps to explain the growth in demand from this group for physical bullion over the rally-to date8.

Analysis of Silver Price Movement

The analysis is based on the past 5 year Silver US prices and Silver MCX prices data. The pre-recession and post-recession periods have been treated independently.

Spot

We begin our analysis from the year 2006 (Exhibit 1). The year saw silver outpacing its other commodity counterparts-gold and platinum, growing at a rate of 58% during the year. Much of this demand is attributable to the launch of Silver Exchange Traded Funds (ETFs) by Barclays. The upward trend continued in 2007 with an increase in the investors’ appetite for silver and strong industrial demand. The end of 2008 (Exhibit 2) saw the US experiencing the subprime crisis. This affected the economic outlook and the world economies in an extremely negative manner. Silver and other commodities saw a steep drop in prices as the investors looked for safer havens. This drop was much more for silver than what gold and platinum experienced. Early 2009 saw signs of recovery for silver. Much of 2009’s strength in investment is attributable to soaring demand for Silver ETFs as well as physical retail investment.

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Exhibit 1 Silver Prices Pre-Recession

Exhibit 2 Silver Prices Post-Recession

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Central Banks:

Central banks can decide to sell a portion of their reserves or buy more on the market limited to

400 tonnes. Central banks influence the price of gold is through loan agreements with the central

banks of other nations. RBI now has gold reserves over $5bn.

Demand from Central Bank: with dollar losing its value, Reserve bank of India and central

banks of most of the developed countries started to increase their share of gold in the storage to

prevent excessive. From the time global financial crisis got off, there seems to be a perceptible

boom in gold prices. There has been increase in the demand of gold from central banks all over

the world and from Reserve bank of India (Karunagaran, 2011). This is confirmed by the gold

investment digest (WGC, 2010) which reported that after two decades, a steady source of supply

to the gold market, in 2010, central banks become ‘netbuyers of gold’. India had also officially

purchased 200 tonnes of gold from IMF in October 2009, which placed its position ahead of

Russia to ninth place (Bloomberg, 2009). This was mainly due to RBI’s strategic move to

diversify its FOREX and also to strengthen the currency (Karunagaran, 2011).

'Exchange Rate'

The price of a nation’s currency in terms of another currency. An exchange rate thus has two

components, the domestic currency and a foreign currency, and can be quoted either directly or

indirectly. In a direct quotation, the price of a unit of foreign currency is expressed in terms of

the domestic currency. In an indirect quotation, the price of a unit of domestic currency is

expressed in terms of the foreign currency. An exchange rate that does not have the domestic

currency as one of the two currency components is known as a cross currency, or cross rate.

Also known as a currency quotation, the foreign exchange rate or forex rate.

How often do exchange rates fluctuate?

Exchange rates float freely against one another, which means they are in constant fluctuation. Currency

valuations are determined by the flows of currency in and out of a country. A high demand for a

particular currency usually means that the value of that currency will increase. Demand for a currency is

created by tourism, international trade, mergers and acquisitions, speculation, and the perception of

safety in terms of geo-political risk. If, for example, a company in Japan sells products to a company in

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the United States and the U.S.-based company would have to convert dollars into Japanese yen to pay

for the goods, the flow of dollars into yen would indicate a demand for Japanese yen. If the total of

currency flow led to a net demand for the Japanese yen, then the yen would increase in value.

Currencies are traded around the clock - 24 hours per day. Even though morning in Tokyo occurs during

U.S. nighttime, trade and banking continue around the world. Therefore, as banks around the world buy

and sell currencies, the value of currencies remain in fluctuation. Interest rate adjustments in different

countries have the biggest effect on the value of currencies because investors typically look for safe

investments with the highest yields. If an investor can earn 8.5% interest on deposits in England, but can

pay 1% interest for the use of money in Japan, then the investor would pay to borrow the Japanese yen

in order to buy the British pound. Such trades take place all the time and in very large numbers.

Currency Fluctuations:

Economists have long recognized the role of currency valuation in pricing commodities,

particularly imported commodities, such as oil and gold. The material commodities however

which possess these qualities in the highest degree are gold and silver. For these very grounds

they’ve been chosen by common consent for use as money, to symbolize the value of other

things: the world market for them is most highly organized (Marshall, 1920). There is a negative

relationship between the value of the dollar and gold and suggests that as the dollar loses value

the price of both commodities increases, as is consistent with recent experience in those markets

(Kim and Dilts, 2011). Gold has inverse relationship with the dollar, recently in USA in great

financial turmoil the dollar has weakened against many currencies, thus it is expected that there

will be increase in the gold prices. Dollar is de-facto currency exchange all around the world.

But now USA on financial depression gold has been substituted as a safe haven for investment.

Weakness in financial market: gold is negatively correlated with the stock, bonds and real-

estate. During any of the financial and non financial crisis investors like to invest in gold. The

movement of gold price is explained in terms of a set of macroeconomic and financial variables

(Aggarwal and Soenen, 1988, Ghosh et al. 2002, Mani and Vuyyuri, 2003). In a specific country,

the gold market may be both supply driven due to ample domestic production or demand driven

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due to huge import demand. In countries like India, which depend completely on gold import are

price-takers, relying upon London fixes of gold prices, entailing for an exogenous impact of gold

price on physical gold demand. The domestic gold price is determined by global gold price,

exchange rate, transaction cost, import duties and some arbitrage component.

Definition of 'Interest Rate'

The amount charged, expressed as a percentage of principal, by a lender to a borrower for the

use of assets. Interest rates are typically noted on an annual basis, known as the annual

percentage rate (APR). The assets borrowed could include, cash, consumer goods, large assets,

such as a vehicle or building. Interest is essentially a rental, or leasing charge to the borrower,

for the asset's use. In the case of a large asset, like a vehicle or building, the interest rate is

sometimes known as the "lease rate". When the borrower is a low-risk party, they will usually be

charged a low interest rate; if the borrower is considered high risk, the interest rate that they are

charged will be higher.

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Literature Review

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Ma and Kao (1990) examined the stock price reactions to the exchange rate changes. The

authors have studied the case of six developed countries namely United Kingdom, Canada,

France, West Germany, Italy and Japan. Monthly stock indices and monthly exchange rates arc

gathered from the Exchange Rates and Interest Rates Tape Provided by the Federal Reserve.

The sample period was from January 1973 to December 1983, and a two factor model was

adopted for the empirical analysis. The paper demonstrates two possible impacts of changes in a

country's currency value on stock price movements. Firstly, the financial effects of exchange rate

changes on the transaction exposure. Secondly, the economic effect from exchange rate changes

suggests that, for an export-dominant country, the currency appreciation reduces the

competitiveness of export markets and has a negative effect on the domestic stock market. On

the other hand for an import dominated country, the currency appreciation will lower import

costs and generate a positive impact on the stock market.Jorion (1991) examined the pricing of

exchange rate risk in the United States (US) stock market, by using two-factor and multi-factor

arbitrage pricing models. For the purpose of empirical analysis, monthly data are collected for a

period ranging from January 1971 to December 1987. The data on the trade-weighted exchange

rate is derived from the weights in the Multilateral Exchange Rata Model (MERM) computed by

the International Monetary Fund (IMF). Monthly data on the Stock market return are collected

from the University of Chicago's Centre for Research in Security Prices (CRSP) database. An

ordinary least squares (OLS) regression method was employed for examining the objective. The

study reveals that United States (US) industries display significant cross-sectional differences in

their exposure to movements in the dollar. However, the empirical results do not suggest that

exchange rate risk is priced in the stock market. The conditional risk premium attached to foreign

currency exposure appears to be small and never significant.

Aggarwal &Lucey (2005) have also discussed about crossing psychological price barriers of

gold. Feldstein (1978) has mentioned how gold prices are affected by inflation. Greely & Currie

(2005) in their paper have examined the causes for increase in demand for gold in last decade

and how this contributed towards price rise of gold.

24

Butler. J (2012) in his book has stated how increasing gold prices will affect economies of

countries and gave measures to cope up with this scenario. Author states that in recent years, the

world witnessed an aggressive growth in gold price. The role of gold in investment has drawn

more attention since this transformational economic crisis began to unfold in 2008.

(Liao S. &Chen ) here authors believe that commodity prices should have different degrees of

influences to individual industries instead of the whole market. The fluctuations in the gold

prices will be effected by the severe fluctuations in the oil prices. This tidal wave started from

the year of 2005 and it seems the trend keeps expanding on their ways. (Mishra and Mohan

2012) the paper depicts that domestic and international gold prices are closely interlinked. And

then it examines the nature of changes in the factors affecting international gold prices during the

last two decades.

For the present research study, the researchers have consulted the literature in various national

and international journals.

Dr. Nikhil Saket (2010) explain in his paper about the another attempt to disentangle the price

movement of gold after the Bretton-Woods system, the last international monetary regime based

on gold. Short-run volatility in international gold prices used to be traditional factors such as

international commodity prices, US dollar exchange rate and equity prices. (Mishra et.al 2012)

this paper is an attempt to analyze the causality relation that may run between domestic gold

prices and stock market returns in India. The study by taking into consideration the domestic

gold prices and stock market returns based on BSE 100 index, investigates the Granger causality

in the Vector Error Correction Model for the period January 1991 to December 2009. The

analysis provided the evidence of feedback causality between the variables.last two decades.

Short-run volatility in international gold prices used to be traditional factors such as international

commodity prices, US dollar exchange rate and equity prices.

Krauth (2011) in his article has mentioned about some factors affecting prices of gold. Ho,

Wang &Liou (2010) also have stated that gold prices are affected by dollar index. last two

decades. Short-run volatility in international gold prices used to be traditional factors such as

international commodity prices, US dollar exchange rate and equity prices.

25

(Mishra et.al 2012) this paper is an attempt to analyze the causality relation that may run

between domestic gold prices and stock market returns in India. The study by taking into

consideration the domestic gold prices and stock market returns based on BSE 100 index,

investigates the Granger causality in the Vector Error Correction Model for the period January

1991 to December 2009. The analysis provided the evidence of feedback causality between the

variables.

This chapter reviews various empirical studies related to the linkages between the stock prices

and the exchange rates. This review has been divided into two sections. The first section deals

with studies related to empirical validity of market integration hypothesis with reference to

foreign exchange market and stock market and inter-relationship between the two at the

international level. The second classification deals with studies pertaining to the validity of

market integration hypothesis in foreign exchange market and stock market and inter-

relationship between the two at the national level. This classification is done to examine the

various empirical issues of the relation between foreign exchange rates and stock prices.

This classification again helps us to find the studies which are giving conflicting results, and also

to identifying the gap with special reference to India. Besides, the studies which are giving

conflicting results and have not received due importance should be considered for further

empirical research. With these objectives in mind the empirical studies have been discussed

below: International-level Studies Eur and Resnick (1988) tried to develop ex ante portfolio

selection strategies to realize potential gains from international diversification under flexible

exchange rates. For the empirical analysis the Morgan Stanley Capital lntemational Perspective

daily stock index values for the United States and the other six countries were adopted. The stock

indices of United States, Canada, France, Germany, Japan, Switzerland, and the U.K. were value

weighted and it was a representative of a domestic stock index fund. The data series were

provided in both the United States and the local currencies for the period from December 3 1,

1979, through December 10, 1985. Methods such as correlation, variance and covariance have

also been employed to know the changes in stock market across the countries The analysis

reveals that exchange rate uncertainty is a largely non- diversifiable factor adversely affecting

the performance of international portfolios. The authors have suggested two methods such as

26

multi-currency diversification and hedging via forward exchange contracts for reducing the

exchange rate risks.

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OBJECTIVE

28

Find out the factors who are responsible for the fluctuation in gold /silver price

To find out the impact of fluctuation in gold/ silver on Indian currency

To study present situation of gold and silver its price in Indian economy.

To understand the actual value of the Indian rupee when gold and silver price fluctuate period of 10years.

29

RESEARCH METHODOLOGY

30

Research Methodology“Methodology” implies more than simply the methods you intend to use to collect data. It is often necessary to include a consideration of the concepts and theories which underlie the methods. For instance, if you intend to highlight a specific feature of a sociological theory or test an algorithm for some aspect of information retrieval, or test the validity of a particular system, you have to show that you understand the underlying concepts of the methodology.

When you describe your methods it is necessary to state how you have addressed the research questions and/or hypotheses. The methods should be described in enough detail for the study to be replicated, or at least repeated in a similar way in another situation. Every stage should be explained and justified with clear reasons for the choice of your particular methods and materials.

There are many different ways to approach the research that fulfils the requirements of a dissertation. These may vary both within and between disciplines. It is important to consider the expectations and possibilities concerning research in your own field. You can do this by talking to your tutors and looking at dissertations written by former students on your course.

Research Type:

Exploratory research.

Tools for data collection:

Research is based on secondary data.

Internet Newspaper Literature Review

Related to gold, silver, exchange rate, and inflation rate

Tools for Data Analysis:

The data analysis will be done by using regression and Anova as the tool. Performed Regression analysis on this data to observe correlation of the dependent variable with the independent variables. Contribution of each independent variable individually and their collective impact on the dependent variable will be observed.

Study period:

Related to gold ,silver, exchange rate, and inflation rate .The trend analysis study period is 10 years of 2001-2012.

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32

Data analysis

.

Date

Silver Rate (1 Kg)

Exchange Rate US Dollar Observations

Predicted Exchange Rate US Dollar Residuals

Standard Residuals

3/31/2001 7,215

47.1861 45.77857 1.40713 0.65469

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3/31/2002 7,875

48.5992 45.77444 2.82486 1.31432

3/31/2003 7,695

46.5823 45.77557 0.80623 0.37512

3/31/2004 11,770

45.3174 45.75007 -0.43357 -0.20173

3/31/2005 10,675

44.15 45.75692 -1.65692 -0.77092

3/31/2006 17,405

45.3076 45.71482 -0.40782 -0.18975

3/31/2007 19,520

41.3497 45.70159 -4.35309 -2.02536

3/31/2008 23,625

43.5058 45.67591 -2.17101 -1.01011

3/31/2009 22,165

48.4059 45.68505 2.71985 1.26547

3/31/2010 27,255

45.72610 45.65320 0.07300 0.03396

3/14/2011 54,790 46.672 11 45.48095 1.19135 0.55430

SUMMARY OUTPUT

Force Constant to ZeroFALSE

Regression StatisticsMultiple R 0.040

R Square 0.002Goodness of Fit < 0.80

Adjusted R Square -0.109Standard Error 2.266Observations 11

ANOVADf SS MS F P-value

Regression 1 0.0741717460.074171746

0.014450756 0.907

Residual 9 46.194518055.132724228

Total 10 46.26868980.95

Coefficients Standard Error t Stat P-value Lower 95% Upper 95%

Intercept 45.8237063 1.205638625 38.0078287 0.000 43.0963623 48.5510504

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5 3 1

Silver Rate (1 Kg)

-6.25587E-06 5.20406E-05

-0.120211298 0.907

-0.00012398 0.000111468

y = 45.824 0*Silver Rate (1 Kg)

RESIDUAL OUTPUT PROBABILITY OUTPUT

FINDINGS:-

Silver price are fluctuate and Correlation coefficient R of 0.40clearly explains the relationship between the actual values of three independent variables of gold rate ,silver rate nd exchange rate deficit and the dependent variable exchange rate if India Rupee. Also, the Coefficient of determination R Square of 0.002 explains how well the independent variables -inflation, interest rates, current account deficit explain the fluctuations in the Exchange rate.

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Rational OF Studies

36

Between the processes of research it will be analysis the Major factors affects the Indian Exchange Rate and Indian currency . In this analysis we will analyze what are the factors that affect the Indian currency Rate. The below given factors affects the Indian Exchange rate.

Exchange Rate 10 year Interest Rate Inflation Rate Monitory policy Political situation Balance of payment Speculation Internal budget deficit or surplus In this research we will mainly focus on thehow gold and silver price fluctuation impact

on Indian currencys. It will analyze that why the Indian Exchange Rate goes down that is why Indian Currency fluctuates.

LIMITATION

Due to the limitations in the number of words we were only able to perform regression on 3factors affecting the Exchange rate of Indian Rupee. We can further add other major factors toexplain the volatility of Indian Rupee’s exchange rate. Certain factors likepublic debt, gold reserves, FII, FDI, foreign exchange reserves, bank rates, trading terms, silver rateetc., can be added to the independent factors and a multiple regression of the same can give a better picture of the dependence of exchange rate on these factors. There are several other factors which influence the exchange rate like socio-economic policies, political scenarios etc., but many of them are out of scope of mathematical correlations as they are not measurable easily.

37

Conclusion

This analytical paper studies the various factors contributing towards the continuously escalating

prices of gold and silver in India and how factors like international business environment,

political environment, market conditions, its induction in commodity market, buying behavior of

consumers, and inflation have affected prices of gold during last decade. From period 2002-2012

adopt trend analysis which provides us the relevant picture of Indian domestic gold prices with

many factors like its production, demand and dollar price fluctuation. By the help of correlation

this study shows that how gold price influenced with other factors and states a positive result.

Based on empirical test results, reveal that there are positive correlations between gold prices

with all other major factors. From the point of view of advance research, there is a need to

concentrate on the issue whether gold and silver represent a prolific asset in India. Such a

research will have far accomplishment connotation for policies relating to gold in context with

domestic market.

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