Gold is one of the most sought-after investment options as it is considered to be safer than other investment options. In India, it is also seen as a symbol of good fortune, prosperity and it also possesses an inherent value in terms of wealth and purity. Indian hold 11% of the total world’s gold and that makes it the largest holder of gold in the world. There is a direct link between gold prices and the Stock market. They both are negatively correlated. A rise in prices of stocks makes the value of gold fall and vice versa.
The effect of the gold process on Indian economy is studied taking into consideration the prevailing macroeconomic conditions. Past experiences have indicated that during periods of economic slump, the gold market has always shown an uptrend. In case the future expectations of the global economy are bleak, people usually sell stocks and start investing in gold or US dollar. They are so because gold is considered a safer investment option when compared to stocks or equities. This rise in demand for gold makes its price rise. Foreign Direct Investor (FDI) and Foreign Institutional Investors(FII) pull money out of the Indian stock market and the market falls. as a result of the expansionary Monetary policy, the US Dollar weakened and high inflation prevailed. All of these factors along with a low rate of interest made gold more attractive than stocks.
A rise in the GDP implies a positive business cycle and this is the type of environment is considered suitable to invest in either stocks or equities. In this phase, people generally reduce investments in gold and they buy more stocks. The market rises due to the stock market’s influx of funds. After the 1970’s gold had suddenly become less appealing. This is primarily because in this stage inflation was under control and the economy managed to stabilize. One has to consider that with regard to individual stocks, the value of banking stocks and gold-based ETF’s will rise with an increase in the price of gold. Other stocks are not necessarily affected the same way and could rise or fall as a result of the fluctuation in the price of gold.