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There is a general tendency that whenever the share market is down the gold market is up and vice versa.Kindly clarify whether the value/price of gold ETF will depend upon the Sensex/Nifty in India or upon the gold market of India/world.



6 Answers

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1 Aniruddha patil November 26, 2011 at 9:10 pm

it is not always true that when share market falls ,gold price go up. It is just that due to change in sentiment of people particularly FIIs, whenever economic situation is not good (such as high inflation, high fiscal deficit, high unemployment, etc) FIIs pull out their money from market and invest into gold / currency market. As gold act as hedging tool so to mitigate their risk, they feel its safe to invest in gold. But this is not always true as the gold prices are decided by international events of supply and demand and so it fluctuates.

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2 Abhishek November 26, 2011 at 11:12 pm

Hi

There is no correlation between Gold ETF and Nifty. Gold ETF tracks the price of Gold.

Regards
Abhishek

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3 ashal jauhari November 27, 2011 at 7:27 am

Dear Ponniah, the Gold ETF’s prices track the underlying asset – gold. there is no correlation between Eq. & Gold price.

Thanks

Ashal

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4 Manish Chauhan November 27, 2011 at 11:57 am

@Ashal & Abhishek

Why are we saying that there is no co-relation between equity and gold ? While they are not derivatives of each other , but movement in one affect another which might be because of sentiments only , but there exists a co-relation .. Its seen that when equity markets fall , the uncertainity in markets make people fearful and they rush to put their money in safe things and gold is one of them ..

We can see that from past examples .. So from that angle their is a co-relation . What do you say ?

Manish

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5 justgrowmymoney November 27, 2011 at 12:24 pm

Manish – I have to say yes and no.

You said: “markets fall , the uncertainity in markets make people fearful and they rush to put their money in safe things and gold is one of them ..”. ABSOLUTELY true, this is the fight to safety principle.Thus equity and gold are inversely related.

However lets ASSUME the market moves from the 15000 levels to 20000 levels in the next 1 year (33%). Now Gold will NOT FALL in this time period. It will only go up but in a muted fashion just as much or lesser than inflation rate (say 9%) (ie) it will touch~ 3000.

Gold is really an Inflation hedge. At times it moves with the markets (at/lower inflation rate) and at times moves faster than inflation rate. However, if you see the history of gold, at least since it has been closely tracked for the last 40 years, it is a near-perfect inflation hedge (not fully yet!) and thats all. Hence it will protect your overall portfolio from the downside which is why it is recommended to have some 5% -10% allocation to gold usually.

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6 DP November 27, 2011 at 7:09 pm

Equity and gold are two awesome asset classes, which does wonders to an investment portfolio. Equity on one hand enables to create wealth over the long-term and also hedges inflation, while gold acts like insurance, during economic turmoil and turbulent times of the equity markets.

Gold has traditionally been seen as a very conservative investment due to its relative scarcity, but it tends to be a very accurate reflector of short term fear about the economy in general. When things are “bad” the price of gold rises; when things are “good” it falls.

It is acceptable fact that generally people go for save heaven in case equities fall, gold is one of them but in general, gold has negative co-relation or independent from other asset classes or financial and macro-economic measures.

As rightly suggested by growmymoney, it is an inflation hedge but as per me it is also an insurance against the financial slow downs/turmoils.

Regards,

DP

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