Fast food for thought!
Hey folks i know its been long since i have written something. But being avid follower of Warren Buffet, i follow what he said once - " Be greedy when everybody is fearful and be fearful when everybody is greedy". Yes markets are at 30 weeks high so everyone is greedy out there on D-street and "trying" to mint money. Hence i am fearful and away from Mr. Market. (Ofcourse i was greedy ["and i minted money"] when everyone else was fearful before!!). So am having some spare time at hand and hence i've decided to generate some E-waste ;)
So to start with here it goes -
Today i would like to discuss on most talked about correlations existing in market. I am presuming that people reading this blog are having meagre knowledge like me. So 1'st i would get some ground work done and then we will take off.
Basics -
1. Let us suppose 1$ = 45 Re . Now if i say that Re strengthens then this means Re appreciates / Dollar depreciates / Dollar weakens hence now 1$ = 40 Re. Strenghtening of Re adds to bottomline of importers and strenghtening of dollar adds to bottomline of exporters.
2. Gold and Crude oil almost move in same direction unless OPEC intervenes because both are global commodities. But crude oil is more liquid [ both in absolute sense and trade sense ;-) ] and hence more volatile than gold. Hence you can interchange gold and crude oil in coming lines.
Correlations -
a . GOLD
USA being super power, general economic position of USA largely sets the trend for gold/crude oil.
1. Hence weakening dollar (weakening USA economy), rising inflation, lower yields/interest rates, tumbling stock markets sets the perfect stage for gold. As all these factors lead to investment in gold.
Thus long US$ = long Dow Jones = short gold/crude oil.
However as such there is no general correlation of these things with gold per say.
2. But ha one thing is definite - when things are in bad shape then gold becomes safe haven to invest and hence gold prices always surge in bad times.
Post Lehman fiasco - gold rose around 23% in one year!!
Thus when things become dull, go and invest in yellow metal - GOLD.
b. Bond prices -> Interest rates /Inflation -
1. In strong economic condition - consumption increases - inflation increases - SO interest rates are increased (deliberate) to curb the purchasing power of people and hence curb inflation.
2. Also if interest rates in India falls then FII's borrow money from Indian markets at lower rate and move out of India. So demand for ruppee falls and hence Re weakens/dollar strengthens and vice versa.
c. Dollar - Rupee -
1. If interest rates in India are set to rise to control liquidty/inflation then FII's will borrow from world markets at lower rate and deposit in India at higher rates. In this case rupee outflow / rupee demand will increase and so rupee will appreciate / dollar will weaken [ this is live scenario in current Indian market ]. This is benefit to importers and exporters will be at recieving end.
d. Equity market -
1. Higher the inflation - higher is the trade in equity markets to beat inflation. In India in year 2008, inflation reached to levels of 11% and so equity markets also scaled new highs.
2. If interest rates are set to rise then equity markets will tumble as people will moved to Fixed income securities.
Point 1. and 2. are linked like -> higher the inflation - interest rates will be increased - equity markets will slow down.
Summing up -
Rise in inflation -> increase in interest rate -> more dollar deposits in India -> rupee strenghtens/dollar weakens -> importers benfit/exporters lose -> markets slow down/tumble -> Gold appreciates.
NOTE - I am a student and hence contest my views if i am wrong at some point but appreciate me if you feel what i have written has done some value addition on your part !!
I hope i have served the purpose in crisp and simple way.
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