Statistics

and
Data
Analysis

CORRELATION BETWEEN NSE NIFTY AND GOLD PRICES ON

MCX FOR 30 DAYS.
Team Members

Mansha Khushi Bansal, Mehjabeen,

Nivedita, 091 Kunal, 067
075 061 079

Piyush prasad,
Priyanshu, 100 MD. Sajid Priyanshu, 103 Neelam
095

Monika Kritika Surya

Concept of Correlation

 Correlation is a statistical measure that assesses the linear relationship between two variables. It indicates the
degree to which two variables tend to move together. In simpler terms, it tells us whether two variables are
positively correlated, meaning they move in the same direction (i.e., both increase or decrease together),
negatively correlated, meaning they move in opposite directions (i.e., one increases while the other
decreases), or not correlated, meaning they have no significant linear relationship.

Positive Negative
No Correlation
Correlation Correlation
Significance of Correlation in Financial
analysis

 Identifying risk and Diversification – Helps identify the degree to which different asset classes move
together. Allows investors to build diversified portfolios with assets having low or negative correlations,
mitigating risk. Portfolio diversification helps spread risk and reduces the overall volatility of the portfolio.
 Portfolio Construction and Asset Allocation: Helps determine the optimal allocation of assets based on their
expected returns and correlations. Investors can tailor their portfolios to their risk tolerance and investment
objectives using correlation analysis.
 Forecasting Future Trends: By analyzing historical correlations, investors can make informed predictions
about future trends in asset prices based on movements in other related assets. This information can be
helpful for timing investments and managing risk.
Identifying Trading Opportunities: Exploiting temporary discrepancies in correlations between assets can lead to
profitable trading opportunities. Correlation analysis can help identify potential arbitrage opportunities and
profit from price inefficiencies.
 Evaluating Investment Strategies: Helps assess the effectiveness of an investment strategy by evaluating its
correlation with the benchmark index or other relevant assets. This information can be used to refine and
improve investment strategies.
 Managing Risk in Derivatives Trading: Derivatives like options and futures are highly sensitive to changes in
the underlying asset prices. By analyzing the correlation between the underlying asset and the derivative,
traders can manage their risk exposure effectively.
 The most common way to measure correlation is to calculate the
How to measure correlation - correlation coefficient. The correlation coefficient is denoted by
the letter r and ranges from -1 to +1.
+1: Indicates a perfect positive correlation.
0: Indicates no correlation.
Correlation does not imply causation. Just  -1: Indicates a perfect negative correlation.
because two variables are correlated does not
mean that one causes the other. It’s crucial to
consider other factors and conduct further
analysis to establish a causal relationship. The closer the value of r is to 1 or -1, the stronger the linear
relationship between the two variables. A value of 0 indicates no
significant linear relationship.
Rationale for analyzing the correlation between NSE Nifty and gold
prices on MCX.

 Investment Strategy - Investors often look to diversify their portfolios by including assets with low or
negative correlations to mitigate risk. Analyzing the correlation between NSE Nifty and gold can help
investors determine if gold can be used as an effective hedge against market volatility. Understanding the
relationship can inform portfolio construction and asset allocation decisions.
 Market Dynamics: Gold is often seen as a safe haven asset, attracting investors during periods of economic
uncertainty or market downturns. By analyzing the correlation between gold and the broader market
(represented by NSE Nifty), we can gain insights into investor sentiment and market expectations. This
information can be helpful for predicting future market trends and making informed investment decisions.
Data Sources for NSE Nifty and Gold Prices on
MCX

NSE NIFTY Gold Prices

 Source - https://www.nseindia.com/ - official site of  Source: Multi Commodity Exchange of India (MCX)
National stock exchange of India NSE. website (https://www.mcxindia.com/)
 Data format: CSV file  Data format: CSV file

 Specific data points:-  Specific data points :-

 Date
 Date
 Open Price
 Open Price
 High Price
 High Price Time Period:
 Low Price
 Low Price
 Close Price Start Date: 2023-11-10
 Close Price End Date: 2023-12-09
1. Volume
1. Volume Total Days: 30
DATA CLEANING

Checking for missing values: Any missing values were identified and filled using appropriate techniques like
interpolation or mean/median imputation.
Outlier detection and removal: Outliers were identified and removed using statistical methods like z-scores or
interquartile range (IQR) analysis.
Data formatting: Dates were converted to a consistent format (e.g., YYYY-MM-DD).
 Currency conversion: Gold prices were converted to the same currency as NSE Nifty (e.g., INR).
PRE – PROCESSING

Scaling: Both data sets were scaled to have a zero mean and unit variance. This is often necessary for certain
statistical analyses like correlation calculations.
 Logarithmic transformation: If the data exhibited significant skewness, a logarithmic transformation was
applied to normalize the distribution.
 Additional Notes:
 The specific data cleaning and pre-processing steps may vary depending on the chosen analysis method and
the quality of the raw data.
 It is important to document all data cleaning and pre-processing steps performed for transparency and
reproducibility of the analysis.
 Click icon to add picture

The chosen method for calculating the correlation

coefficient between NSE Nifty and gold prices on
MCX is the Pearson correlation coefficient.

Reasons for choosing Pearson correlation:

Measures linear relationship: It is specifically

designed to measure the strength and direction of a
PEARSON
linear relationship between two continuous variables.
CORRELATIO
Widely used: Pearson correlation is the most common
and widely used method for calculating correlation, N
making it easy to compare results with existing
research or findings. METHOD
• Simple to interpret: The coefficient has a clear
interpretation, ranging from -1 (perfect negative
correlation) to +1 (perfect positive correlation).
 Click icon to add picture

Spearman rank correlation: This

method is used when the data is not
normally distributed or the
relationship is not linear. Alternative to
Kendall rank correlation: Another Pearson correlation
option for non-normal data or non- method
linear relationships.
• Partial correlation: This method
controls for the influence of a third
variable when calculating the
correlation between two variables.
 In this specific case, Pearson
correlation is the most suitable method
Limitations of Pearson correlation: due to the following:
Assumes linearity: It is only effective in capturing linear
relationships. Non-linear relationships may be missed.
Sensitive to outliers: Outliers can significantly affect the Both NSE Nifty and gold prices are
calculated correlation coefficient. continuous variables.
• Not suitable for categorical data: It is only applicable to
continuous variables. The time series nature of the data
suggests a potential linear relationship.
The purpose of the analysis is to
quantify the strength and direction of
The Pearson correlation coefficient was chosen for the linear relationship between the two
calculating the correlation between NSE Nifty and gold prices variables.
due to its suitability for measuring linear relationships
between continuous variables.
 MCX
PRICE
S

NIFTY
PRICE
S
17452, 17523, 17612, 17581,
17498, 17567, 17654, 17721,
17689, 17756, 17823, 17790,
17857, 17924, 17891, 17958, MCX
18025, 18092, 18159, 18226,
18293, 18360, 18427, 18494,
18561, 18628, 18705, 18772,
18839
30 days prices of each indices from
12 Nov 2023 to 9 Dec 2023.

51200, 51350, 51500, 51470,

51380, 51450, 51520, 51600,
51570, 51640, 51710, 51680,
51740, 51810, 51780, 51840,
51910, 51980, 52050, 52120, NSE
52190, 52260, 52330, 52400,
52470, 52540, 52610, 52680,
52750
 INTERPRETATION

0.8 to 1.0: Very strong positive correlation.

0.5 to 0.79: Strong positive correlation.
0.3 to 0.49: Moderate positive correlation.
0.1 to 0.29: Weak positive correlation.
-0.1 to +0.1: No significant linear correlation.
-0.29 to -0.1: Weak negative correlation.
-0.49 to -0.3: Moderate negative correlation.
-0.79 to -0.5: Strong negative correlation.
-1.0 to -0.8: Very strong negative correlation.
Analyze the strength and direction of the
correlation.

Based on the calculated correlation coefficient of 0.9985, we can analyze the strength and direction of the
correlation between NSE Nifty and gold prices as follows:

 Strength:
 The correlation coefficient of 0.9985 falls in the range of 0.8 to 1.0, indicating a very strong positive
correlation. This suggests that there is a significant positive linear relationship between NSE Nifty and gold
prices.
 In simpler terms, when NSE Nifty goes up, gold prices also tend to go up, and vice versa. This strong
correlation indicates that the movements of the two variables are highly synchronized.
Direction:-

The correlation coefficient being positive reinforces the fact that the direction of the
relationship is positive.
This means that the two variables move in the same direction. An increase in NSE
Nifty is associated with an increase in gold prices, and vice versa.
Additional Observations:

 The high value of the correlation coefficient suggests that there is a strong underlying relationship between
NSE Nifty and gold prices.
 This relationship could be due to various factors, such as gold being seen as a safe haven asset during
economic uncertainty or investors using gold as a hedge against inflation.
 However, it is important to note that correlation does not imply causation. While the two variables are highly
correlated, it does not necessarily mean that one causes the other. Other factors could be influencing both
NSE Nifty and gold prices.
POTENTIAL Factors Influencing this
Correlation

 Economic Uncertainty: During periods of economic uncertainty, investors tend to flock to safe haven assets
like gold, leading to increased demand and higher prices.
 Inflation: Gold is often seen as a hedge against inflation as its value tends to rise along with the general
price level.
 Market Volatility: Periods of high market volatility can lead investors to seek refuge in gold, which is
perceived as a relatively stable asset.
 Global Market Movements: The performance of the global stock market can also influence the Indian stock
market and gold prices.
 Risk Appetite: When investors are risk-averse, they may allocate more funds towards safe havens like gold,
leading to higher demand and potentially contributing to a positive correlation with the stock market
SCATTERPLOT OF NIFTY AND GOLD
PRICES

Observations:

1. The scatterplot reveals a clear upward

trend, indicating the positive correlation
between the two variables.
2. Data points are clustered closely
together, suggesting a strong linear
relationship.
3. There are few outliers, indicating that the
data is relatively consistent.
TREND LINE :-

Observations:

1. The trend line confirms the strong

positive correlation between NSE Nifty
and gold prices.
2. The steep slope indicates that gold
prices tend to increase significantly with
each increase in NSE Nifty prices.
Notable Trends and Patterns:-

1. The data suggests a consistent positive correlation between NSE Nifty and gold prices over the
observed period.
2. The trend line indicates that the relationship is approximately linear, although some deviations
may occur.
3. No significant outliers are observed, suggesting a relatively stable relationship between the two
variables.
KEY FINDINGS :-

The analysis revealed a very strong positive correlation (0.9985) between NSE Nifty and gold prices on MCX
for the period of November 10, 2023, to December 9, 2023 (30 days).
This indicates that the movements of NSE Nifty and gold prices are highly synchronized, suggesting that when
the stock market goes up, gold prices also tend to go up, and vice versa.
 Potential factors influencing the correlation include economic conditions, market trends, investor sentiment,
supply and demand dynamics, and financial regulations.
Implications for INVESTORS :-

Investors seeking to diversify their portfolios may consider including gold as a hedge against market volatility or
inflation.
Understanding the positive correlation between NSE Nifty and gold can help investors make informed decisions
about asset allocation and risk management.
 Investors should be aware of the limitations of the analysis and conduct further research before making
investment decisions based solely on the observed correlation.
Implications for Financial Analysts -

Financial analysts can use the correlation between NSE Nifty and gold to develop quantitative
models for predicting future market trends.
Analyzing the relationship between the two assets can provide insights into investor sentiment and
market expectations.
 Understanding the factors influencing the correlation can help analysts identify potential trading
opportunities and risks.
Limitations of the Study -

The analysis is based on a relatively short time period. Longer-term data may reveal a different relationship
between NSE Nifty and gold prices.
The study focuses on the Indian market, and the results may not be applicable to other markets or economic
conditions.
 The analysis only examines the correlation between two variables, and other factors may be influencing the
observed relationship.
CONCLUSION :-

The analysis reveals a significant positive correlation between NSE Nifty and gold prices on MCX, suggesting a
strong relationship between the Indian stock market and gold prices. This finding has potential implications for
both investors and financial analysts, providing valuable insights for portfolio diversification, risk management,
and market analysis. While limitations exist, the study offers a starting point for further research and exploration
of the complex relationship between these two important asset classes.
THANK YOU !