Indian Business Scenario - Opportunities and Challenges Volatility in the Gold Future Market *S.

Rajesha *Assistant Professor in Commerce, Urumu Dhanalakshmi College, Kattur-620019, Tamil Nadu, India. Abstract This Paper examines the one of the Precious Metal (Gold) in the NCDEX. The main objective of this paper is to find out whether there is more volatile in the Gold Spot Market or the Gold Futures Market. For the analysis of the study, the Closing Price of the Gold Spot and Gold Future data is collected from NCDEX for the period of 2008 to 2012.The Study found that there is more Volatility in the Gold Futures Market. This Study also recommended the investor to invest in the Gold Spot Market rather than Gold futures Market. Keywords: Commodity Market, Gold, Futures Prices, Volatility. Introduction A precious metal is a rare metallic chemical element of high economic value. Chemically, the precious metals are less reactive than most elements, have high luster and high electrical conductivity. Historically, precious metals were important as currency, but are now regarded mainly as investment and industrial commodities. Gold, silver, platinum and palladium each have an ISO 4217 currency code. The best-known precious metals are gold and silver. While both have industrial uses, they are better known for their uses in art, jewelry, and coinage. Other precious metals include the platinum group metals: ruthenium, rhodium, palladium, osmium, iridium, and platinum, of which platinum is the most widely traded.The demand for precious metals is driven not only by their practical use, but also by their role as investments and a store of value. Gold is valued in India as a savings and investment vehicle and is the second preferred investment after bank deposits. The price of gold depends on a host of factors, which makes it very difficult to predict. In a fashion similar to shares, gold is an asset class by itself. In fact, in many villages and small towns of India, gold is preferred to bank deposits as a savings and investment instrument. Till a year ago, to gain from price volatility, one would have to hoard and trade in gold physically. Not any more, however. With the commodity futures market operating in full swing, one has the option of not physically stocking gold to gain from its price movements. Trading in futures is better than the option of hoarding gold. Firstly, there are several costs associated with the process of physically stocking gold. Some countries hallmark gold with a three-digit number that indicates the parts per thousand of gold. In this system, "750" means 750/1000 gold (equal to 18K); "500" means 500/1000 gold (equal to 12K). Alloyed gold comes in many colors. Review of Literature In this section the various articles are referred relevant to the present study .The statistical model used in the different articles will be presented since this is vital for comparison to our own study .In brief the GARCH and the Ordinary least square regression model are the two most common statistical methods are used .Risk evaluation has long been a focus for all financial institutions. Such evaluation cannot be done without measuring the volatility for asset returns.

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Indian Business Scenario - Opportunities and Challenges In this study by cocoon kucukozmen (2007) examined a mean variance model was tried to generalized for the London p.m fixing gold price ounce with U.S dollar ,Japanese Yen and South African Rand with 2000 to 2007 daily data. In the analysis part a comparison was made between twelve GARCH (1, 1) and GARCH (1.2) models (GARCH, IGARCH, EGARCH, LGARCH with three different distribution) so as to find the optimal GARCH model within the GARCH class of model. Evaluating the results it can be concluded that the best model for gold price of South African rand and U.S dollar was IGARCH (1, 2) with normal distribution Objective of the Study The primary objective of this study is, to report the volatility structure of gold price between spot and futures market. Hypothesis of the Study The present study is an attempt to test whether the futures prices of sample commodity have volatile. Based on this, the following research hypothesis has been proposed: There is no significant volatility in the gold spot and futures market. Methodology of the Study I. Sample Design For the purpose of this study the gold is chosen, since the gold has a high volatility compared to other commodities .In India MCX, NCDEX and NMCEIL are the three national level commodity exchanges and others 20 Regional Exchanges among that NCDEX is the biggest one. In National Commodity Derivatives Exchange (NCDEX) the precious metals which deal with gold, silver &platinum. II. Sources of the Data Daily closing price of gold spot and future data is obtained from NCDEX website. The total observation of data is 1021 after adjustment. The various internet sources like Google Searches and commodity websites are used. Articles related to gold were found in database searches like SSRN, Econ papers and Economics Bulletin. III. Period of the Study This study measured the volatility structure of gold spot and future for the period of four years, the spot and future data covered a period from April 2008 to March 2012 IV. Tools Used For Analysis In order to analyse the volatility of futures prices in commodity market, the Generalized Autoregressive conditional Heteroskedascity (GARCH (1, 1)) have been used. Analysis and Interpretation 1. Volatility Tested in the Gold Spot Data The basic GARCH (1, 1) results are given in Table 1 the three coefficients in the variance equation are listed as C, the intercept; ARCH (1), the first lag of the squared return; and GARCH (1), the first leg of the conditional variance. The Rsquared denotes the regression coefficient of dependent variable with independent variable .The adjusted R-squared (0.533106) and the R-squared (0.523105) value show that there is a linear relation between the two and the value is close to 1.This 2 Archers & Elevators Publishing House www.aeph.in

Indian Business Scenario - Opportunities and Challenges value clearly indicates that the yesterdays price has influenced the todays price .The Akaike info criterion and Schwarz criterion test helps to find out price relationship between one day and another day. In the present study, the value of Akaike info criterion value (2.842054) is less than the Schwarz criterion value (2.861377) and it also indicates the volatility of the market. Further the value of coefficients constant is (0.489031) less than one, which is required to have a mean reverting variance process.. While the value of Arch and GARCH is 0.008505 and 0.519943 respectively. The GARCH value (0.519943) is more significant than the ARCH (-0.008505). It is also significant to the constant coefficient value. Here the standard errors of regression coefficient were used to estimate the error. In this study, the standard error of regression is above zero (1.271485) and the value of Z-statistic is 1.815932.The statistical value (1.815932) which is greater than the critical value and it clearly shows that there is significant volatility between the prices. Table - 1 GARCH (1, 1) model Variable C RESID(-1)^2 GARCH(-1) Co-efficiet 0.489031 -0.008505 0.519943 Standard error 1.275410 0.029838 1.271485

R-squared Adjusted R-squared Durbin Watson stat S.D dependent variable

Akaike Information 0.533106 criterion 0.523105 Schwarz criterion

2.842054 2.861377 1.815932

2.000914 z-Statistic

0.016449 Probability

0.007418

Source: computed from E-views Testing of Hypothesis From the above analysis of GARCH Volatility test, it is clear that there is volatility in the gold spot market and thus the hypothesis is rejected. 2. Descriptive Statistics for Gold Features Data Table -2 gives descriptive statistics for future gold return data for the period of four years 2004 to 2007. By the help of these statistics, it can be seen that Skewness and the excess kurtosis of the return data are -0.801027 and 9.900971.The kurtosis which exceeds the normal value 3 and it indicate a left symmetric and high peaked distribution, in which it takes into account excess kurtosis (fat tail behavior) and volatility clustering. In Skewness the value 0.801027 which indicates a left skewed it means the left tail is longer than the mass of the distribution and it is concentrated on the right of the figure, which 3 Archers & Elevators Publishing House www.aeph.in

Indian Business Scenario - Opportunities and Challenges means the return data is not normal. The Jarque-Bera value test which also indicate that the data is not normal with the help of left Skewned The mean of the return are almost identical to the series and it is close to zero (0.000521). The high value 0.008647 of standard deviation, the minimum value -0.067197 and the maximum value 0.039321 are also indicating that there is volatility in the data. Table -2 Descriptive Statistics of Future Gold Return data From 2008 to 2012 Total Observations Mean Median Maximum Minimum Std. Dev. Skew ness Kurtosis Jarque-Bera Probability Sources: computed from www.ncdex.com Testing of Hypothesis From the above Descriptive Statistics test the standard deviation compare to Maximum value it shows a high risk in the market and is indicate that there is significant volatility in the gold future market during the study period of 2008 to 2012 and thus the hypothesis is rejected. Findings of the Study The following are the findings of the study, 1. From this study, It is clear that in the gold Spot market, the value of Akaike Info criterion value is Rs.2.842054 which is less than the Schwarz criterion value(Rs2.861377) this indicate that the yesterdays price has influenced the todays share price .The R-squared value (0.533106) and the adjusted Rsquared value (0.523105) has a positive correlation towards the gold price. .The standard error value (1.271485) which is also less than the statistical value (1.815932) it indicates that there is volatility in the gold spot market. 2. To Measure the Volatility in the Gold Futures Market through Descriptive Statistics itself it is proved there is a high Standard deviation in the data during the study period. It shows that there is Volatility in the Gold Futures Market. 3. In gold spot and futures markets, Compare the value of spot market Adjusted R-Squared (0.533106) and Standard Deviation (0.008647) of the future market shows that there is more volatile in the Gold Futures Market. 1021 0.000521 0.000642 0.039321 -0.067197 0.008647 -0.801027 9.900971 2133.074 0.000000

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Indian Business Scenario - Opportunities and Challenges Suggestion of the Study The following are the suggestions of the study, 1. It is recommended that the investors who want to take moderate risk they may invest in the gold Spot market. It is to be noted that compared to the gold Future market; the Spot market is having a less volatility. 2. The Speculative type of investors should invest in the Gold spot market .They can earn high return when the market is more volatile. Conclusion This study investigated the empirical relation between gold spot and future price of the gold traded on the NCDEX. The GARCH results suggest that there is a variation across the gold spot and future market. The result shows that the spot market is having a more volatility than the gold futures market. The study recommends that the investor who like to invest in Gold, invest in the gold Spot Market compare with the Gold Futures market.

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