Explainers

Correlation Between Commodity & Stock Markets in India

April 23, 2021

Correlation Between Commodity & Stock Markets in India

A commodity is a good that is interchangeable with other goods of the same type. Commodity prices are fixed based on the supply and demand of these commodities. Typical examples commodities are grains, gold, oil, and natural gas.

Due to the increase in appetite of institutional investors or financial institutions, there has been a rapid expansion in the commodities market in the recent past.

So, why are we talking about this?

It is important to understand the correlation between commodities and stock markets.

Both stocks and commodities play an important role in a portfolio, especially as a hedge to the stock market. Understanding the relationship between the commodities and stock market prices is essential to investors, policy makers, industry and the economy of the country as a whole.

What’s the Correlation Like?

Post the merger of the regulator of the commodity market, FMC with SEBI, the trading ecosystem is gearing up for phenomenal changes. The concept ONE platform for trading of commodities and equities is coming into existence in India.

Although commodity and stock markets are influenced by different factors, there has been significant research to prove the inverse relationship between both.

Let’s see how.

Gold vs Nifty price movement data over more than 10 years is shown. Around the inflection points, there is a visible negative correlation between the price movements of Nifty and Gold. In simpler terms, when Nifty is rising, Gold prices are falling. And vice versa.

There was a huge divergence between gold prices and Nifty in 2012-2013 wherein gold had an uptrend while Nifty was either flat or falling. A similar was observed in Nifty and gold prices in 2015.

gold vs nifty

Source – https://www.equityfriend.com/

What’s the significance?

Theoretically, a perfectly negative correlation ( of -1) between asset classes is perfect for any portfolio. Because as they say, one shouldn’t put all eggs in the same basket.

Diversification helps do away with systematic risk. Thus, bringing in both commodities and equities in a portfolio is expected to result in higher risk adjusted returns. During periods of stock market volatility, commodities trade can be relied upon.

Disclaimer – Investment in securities market are subject to market risks, read all the related documents carefully before investing.This content is purely for information and investor awareness purpose only and in no way an advice or recommendation. You should independently research and verify the information you find on our website/application.

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