analysis of silver returns

1

Chapter 1

INTRODUCTION

2

SILVER COMMODITY

Silver is a precious metal and the spot price not only reflects the current supply and

demand condition but it also reflects investors expectations of future inflation and

other general business and economic conditions. What sets silver apart from other

commodities is that silver has many uses and the demand for silver can change

rapidly due to different reasons. Derived demand theory suggests that the changes in

demand for particular products have implications for commodity prices which are

used as inputs into the final product. For instance, silver can be transformed from its

natural state and used in the technology and medical industries to produce items such

as solar energy, water purification, and X-Ray devices.

Moreover, silver is also used in the electronics, and automobile industries to produce

components for computers and antifreeze materials. In addition, silver can also be

used as an investment vehicle by investors who seek profits or to diversify their

investment portfolio or hedge. Silvers multiple industrial and investment uses have

the potential of making its price more volatile than other commodities. Silvers spot

and futures contracts are traded 24 hours a day on various markets. Silver prices are

influenced not only by industrial demand as other commodities but because it is also

used for investment purpose, silver prices are affected by such major macroeconomic

factors such as inflation, economic growth prospects or even monetary policy.

The price of silver has been very volatile historically. Although the ratio of gold to

silver prices has varied over the past, in recent times we observe that silver prices

follow gold prices and may act as a substitute for them in the future. Silver is also

used in the electronics, and automobile industries to produce components for

computers and antifreeze materials. In addition; silver can also be used as an

investment vehicle by investors who seek profits or to diversify their investment

portfolio or hedge. Silvers multiple industrial and investment uses have the potential

3

of making its price more volatile than other commodities. The study aims to provide

directional inputs that can help predict future trends in the silver prices.

Silver is one of the most precious metals, valued both as a form of currency and store

of value. The major components of silver demand are Industrial use (54%),

Photography (15%), Jewellery and Silverware (26%) and Coins (5%). Twenty

countries together produce 96% of the silver mined globally. Mexico is the largest

producer followed closely by Peru. The main consumer countries for silver are the

US, India, Canada, Mexico, UK, France, Germany, Italy and Japan.

Silver is a major precious metal, valued as a form of currency and as an industrial

metal. It outpaced its other commodity counterparts-gold and platinum, growing at a

rate of 58% during 2006. The primary factor that has been attributed to this strong

growth is the investment driven demand for silver.

Physical silver demand of silver touched record levels in 2013 as investors took

advantage of lower prices to increase coin and bar holdings in particular. Indeed,

silver investors proved more loyal than those in the gold market and Exchange Traded

Fund (ETF) holdings held on to record levels in spite of the significant move away

from commodities as an asset class during 2013. The 23.6% year-on-year decline in

average prices also saw a fall in the amount of silver supplied to the market as modest

gains in mine output were more than offset by a 24.1% decline in scrap supply. This

led to the largest physical deficit in the silver market since 2008, as lower supply met

both higher physical investment demand and a recovery in jewellery offtake. Silver

jewellery demand remained remarkably robust, growing at 9.6% year-on-year. The

cost effectiveness and versatility of the metal make it popular at both the fashion end

of the market, meeting the millennial generations desire for affordable choice, while

also continuing to sell well in high-end branded pieces. Indeed, silvers use in

4

jewellery reached a record high in 2013, with 75% of that growth coming from China

and India where consumption per capita statistics are still relatively low. In terms of

industrial offtake the market remained relatively benign as improved economic

conditions continued to be offset by limited substitution and thrifting. New

applications for silver also remained firmly on the radar, with a steady stream of

announcements in the glass, clothing and hygiene industries pointing to improved

offtake in future years as the metals antimicrobial properties are developed. Overall,

price sensitive demand in the silver market has responded well to the fall in prices

seen in 2013, and importantly, the market has also not only held on to, but grown in

its status as an investment product. In 2014, many jewellery and silverware producers

took advantage of this in order to boost production levels and move away from plated

silver products.

Many consider silver as a future substitute for investment in gold. However its high

volatility has still remained a question of interest. The volatility can be attributed to

multiple factors like gold and other precious metal prices, major stock market indices,

large concentrated short position, oil, institutional investors and industrial demand.

1.1 Applications of silver

Many well-known uses of silver involve its precious metal properties, including

currency, decorative items, and mirrors.

Currency The 20th century saw a gradual movement to fiat currency, with most of the world

monetary system losing its link to precious metals. During this same period, silver

gradually ceased to be used in circulating coins. Silver coins and bullion are also used

5

as an investment to guard against inflation and devaluation.

Jewellery and silverware Jewellery and silverware are traditionally made from sterling silver (standard silver),

an alloy of 92.5% silver with 7.5% copper. Jewellery, silverware, armor, vases, and

other artistic items are made because silver is such a malleable metal, silversmiths

have a large range of choices with how they prefer to work the metal.

Solar energy In 2009, scientist team has developed large curved sheets of metal that have the

potential to be 30% less expensive than today's best collectors of concentrated solar

power by replacing glass-based models with a silver polymer sheet that has the same

performance as the heavy glass mirrors, but at much lower cost and weight. It also is

much easier to deploy and install. The glossy film uses several layers of polymers,

with an inner layer of pure silver.

Air conditioning In 2014 researchers invented a mirror-like panel that, when mounted on a building,

acts like an air conditioner. The mirror is built from several layers of wafer-thin

materials. The first layer is silver, the most reflective substance on Earth. On top of

this are alternating layers of silicon dioxide and hafnium oxide. These layers

improve the reflectivity, but also turn the mirror into a thermal radiator.

Water purification Silver is used in water purifiers. It prevents bacteria and algae from building up in

filters. The catalytic action of silver, in concert with oxygen, sanitizes water and

eliminates the need for chlorine. Silver ions are also added to water purification

systems in hospitals, community water systems, pools and spas, displacing chlorine.

6

Dentistry Silver can be alloyed with mercury at room temperature to make amalgams that are

widely used for dental fillings. To make dental amalgam, a mixture of powdered

silver and other metals such as tin and gold is mixed with mercury to make a stiff

paste that can be adapted to the shape of a cavity. The dental amalgam achieves initial

hardness within minutes, and sets hard in a few hours.

Photography and electronics The use of silver in photography, in the form of silver nitrate and silver halides, has

rapidly declined due to the lower demand for consumer color film from the advent of

digital technology. From the peak global demand for photographic silver in 1999 and

the market had contracted almost 70% by 2013.

Other industrial and commercial applications Silver and silver alloys are used in the construction of high-quality musical wind

instruments of many types. Flutes, in particular, are commonly constructed of silver

alloy or silver plated, both for appearance and for the frictional surface properties of

silver. Brass instruments, such as Trumpets and Baritones, are also commonly plated

in silver.

Medicine The medical uses of silver include its incorporation into wound dressings, and its use

as an antibiotic coating in medical devices. Wound dressings containing silver that

may be used to treat external infections.

Investing Silver coins and bullion are used for investing. Mints sell a wide variety of silver

products for investors and collectors. Various institutions provide safe storage for

7

large physical silver investments, and various types of silver investments can be made

on the stock markets, including mining stocks. Silver bullion bars are sold in a wide

range of ounces, provided by various mints and mines around the world. Silver coins

and bullion bars are generally 99.9% pure, and labelled with ".999".

Clothing Silver inhibits the growth of bacteria and fungi on clothing, such as socks, so is

sometimes added to reduce odors and the risk of bacterial and fungal infections. It is

incorporated into clothing or shoes by the polymer from which yarns are made or by

coating yarns with silver. The loss of silver during washing varies between textile

technologies, and the resultant effect on the environment is not yet fully known.

1.2 Factors Affecting Silver Prices.

Industrial Demand New applications for silver are being explored in batteries, superconductors and

microcircuits, which may further increase non-investment demand. The expansion of

the middle classes in emerging economies aspiring to Western lifestyles and products

may also contribute to a long-term rise in industrial usage. Moreover, retail investors

strong interest in ETFs helps to explain the growth in demand from this group for

physical bullion over the rally-to date.

Gold Prices Silver having a comparatively smaller market as compared to gold, it does not take

much time to drive the prices higher. At the same time when the environment is

bearish, investors lose confidence in silver very fast and cause the prices to fall. From

the analysis of the trend of the gold-silver ratio, it can be seen clearly that silver has a

8

tendency to follow the prices of gold.

Oil Prices It has been argued that the mining of silver is an energy intensive process and hence

as the oil prices rise or fall, the prices of silver would also rise or fall. This however

would be over simplification as it undermines various other important factors.

Stock Indices There is certainly some interplay between the fortunes of the stock markets and

capital flowing into silver. Silvers appeal as an alternative asset is definitely higher

when traditional investments are not faring well. Yet, the relationship between silver

and stock indices are far more nuanced and complex than merely a direct inverse or

even parallel relationship.

Large traders or investors The silver market is much smaller in value than the gold market. The London silver

bullion market turns over 18 times less money than gold. With physical demand

estimated at only $15.2 billion per year, it is possible for a large trader or investor to

influence the silver price either positively or negatively.

Industrial, commercial, and consumer demand The traditional use of silver in photographic development has been dropping since

2000 due to the decline of film photography. However, silver is also used in electrical

appliances (silver has the lowest resistivity of industrial metals).

Currently were seeing a surge of applications all areas: industrial, commercial and

consumer. New products are being introduced almost daily. Established companies

are incorporating silver based products in current lines - clothing, refrigerators,

mobile phones, computers, washing machines, vacuum cleaners, keyboards,

9

countertops, furniture handles and more.

Short selling In April 2007, four or fewer traders held 90% of all short silver futures contracts

totalling 245 million troy ounces, which is equivalent to 140 days of production.

Some silver analysts have pointed to a potential conflict of interest. This led analysts

to speculate that some stores of silver have multiple claims upon them.

Investment demand

Institutional investors over the years have opted to invest in Gold and less so in Silver

and therefore the institutional investor selling has not impacted holdings in Silver that

much. This would suggest the Silver investors are mainly retail investors. However, it

is hard to comprehend why Silver investors have not been spooked by the

redemptions in Gold, especially when Silver prices tend to follow Golds lead. As

things stand, as of late November 2013, the combined holdings in the Silver stood at

19,680 tonnes, which were just 1.4 Precious Metals Forecast - Silver November 2013,

5% lower than the peak holding of 19,960 tonnes seen in mid-March. However,

whereas the accumulation of Silver in the early days helped absorb a large part of the

market surplus, the relatively small increases since 2011 mean that it is not absorbing

much of the supply surplus anymore and that means there is more of the surplus to

weigh on prices. What is surprising is that given the supply surplus, investing in

Silver is and has been a confidence game, so the fact the pull back in prices has not

prompted liquidation selling is all the more remarkable. However, with holdings in

Silver near record highs it does suggest robust confidence in the outlook for Silver

demand down the road. Needless to say, there are concerns in the market that

redemptions could follow and that could then really send prices lower, but if

redemptions have not been triggered by a 63 percent fall in prices, then its seems

10

unlikely they will be spooked by further price weakness. All in all, it seems that

investors like the long term outlook for demand.

Supply

Silver supply in 2012 came from mine output (75%), scrap (24%), forward producer

hedging (< 1%) and net government sales (1%). The biggest change to supply came

from an increase in by-product output from lead and zinc mines. Mine output rose

four percent in 2012, to a new record of 24,478 tonnes, according to the World Silver

Survey. Primary Silver mines provided 28 percent of mined metal (21 percent of total

supply), 39 percent came from by-products of lead and zinc, 19 percent from copper

mines and 13 percent from Gold mines. The largest increases in mine output were

from China, Mexico, Russia and India, while the biggest declines in output were seen

in Chile and the US. Mexico held on to its position as the Precious Metals Forecast -

Silver November 2013 6 worlds largest producer of Silver, having overtaken Peru in

2010 and Peru dropped into third place last year, with China moving up into second

place. Russia climbed from 8th place to 5th place, while India jumped to 13th place

from 17th. Most of Chinas Silver mine output is a by-product from its lead, zinc and

copper mining, all of which have been growing rapidly in recent years, especially lead

and zinc. In 2013, output growth is expected to slow to 1.3 percent from the four

percent seen last year. That said, given that base metal prices are looking heavy and

are sitting just above important support levels, plus supply surpluses are expected

again in most of the metals next year.

11

Bombay Stock Exchan The Bombay Stock Exchange is the oldest exchange in Asia. It traces its history to

1855, when four Gujarati and one Parsi stockbroker would gather under banyan trees

in front of Mumbai's Town Hall. The location of these meetings changed many times

as the number of brokers constantly increased. The group eventually moved to Dalal

Street in 1874 and in 1875 became an official organization known as "The Native

Share & Stock Brokers Association".

On 31 August 1957, the BSE became the first stock exchange to be recognized by

the Indian Government under the Securities Contracts Regulation Act. In 1986, it

developed the BSE SENSEX index, giving the BSE a means to measure overall

performance of the exchange. In 2000, the BSE used this index to open its

derivatives market, trading SENSEX futures contracts. The development of

SENSEX options along with equity derivatives followed in 2001 and 2002,

expanding the BSE's trading platform.

Historically an open outcry floor trading exchange, the Bombay Stock Exchange

switched to an electronic trading system developed by CMC Ltd in 1995. It took

the exchange only fifty days to make this transition. This automated, screen-based

trading platform called BSE On-line trading (BOLT) had a capacity of 8 million

orders per day. The BSE has also introduced the world's first centralized exchange-

based internet trading system, BSEWEBx.co.in to enable investors anywhere in the

world to trade on the BSE platform.

The launch of SENSEX in 1986 was later followed up in January 1989 by

introduction of BSE National Index. It comprised 100 stocks listed at five major stock

exchanges in India - Mumbai, Calcutta, Delhi, Ahmedabad and Madras. The BSE

National Index was renamed BSE-100 Index from 14 October 1996 and, since then,

12

its calculations take into consideration only the prices of stocks listed at BSE BSE

disseminates information on the Price-Earnings Ratio, the Price to Book Value Ratio,

and the Dividend Yield Percentage of all its major indices on day-to-day basis. The

values of all BSE indices are updated on a real time basis during market hours and

displayed through the BOLT system, the BSE website, and news wire agencies. All

BSE Indices are reviewed periodically by the BSE Index Committee. This

Committee, which comprises eminent independent finance professionals, frames the

broad policy guidelines for the development and maintenance of all BSE indices. The

BSE Index Cell carries out the day-to-day maintenance of all indices and conducts

research on development of new indices. SENSEX is significantly correlated with the

stock indices of other emerging markets.

.

13

CHAPTER 2

LITERATURE REVIEW

14

Harper et al. (2012) examined the price volatility in the silver spot (cash) market. A

host of Generalized Autoregressive Conditional Heteroskedasticity (GARCH) models

are used to analyse the volatility of silver prices. The TGARCH (1,1) model indicates

that both positive and negative shocks do not have a significant effect on volatility in

the silver spot market, while both the GARCH (1,1) and EGARCH (1,1) models

indicate that past silver spot price volatility is significant.

Aggarwal and Sundararaghavan (1987) reported that the silver market was not

efficient in the weak form. But, Solt and Swanson (1981) found that futures market

for gold and silver were weak form efficient and that investors cannot earn abnormal

profits.

Ciner (2001) examined the long run trend in prices of gold and silver futures contracts

listed on the Tokyo Commodity Exchange. Using daily closing prices from 1992 to

1998, the results indicated that the long run stable Journal of Finance and

Accountancy Price volatility, relationship between gold and silver future prices had

disappeared. Furthermore, investors are urged to treat each market independently for

price discovery.

Adrangi et al. (2006) investigated price discovery on nearby future prices of various

commodities. Using the daily nearby contract of prices from 1969 to 1999 obtained

from the Chicago Board of Trade (CBT), the researchers find the existence of a strong

bidirectional causality in future prices. Other studies have examined how the addition

of commodities can lead to a well-diversified portfolio.

Kat and Oomen (2007) examined the return properties of 142 daily commodity

futures from January 1965 to February 2005 using a multivariate analysis framework.

They found that commodity futures are roughly uncorrelated with stocks and bonds.

However, commodity returns were positively correlated with unexpected inflation.

15

Still, differing commodities within the sample offered hedges and the researchers

concluded that a well-balanced commodity portfolio offered diversification.

Erb and Harvey (2006) observed similar findings and concluded that a well

diversified portfolio of commodity futures, bonds and equities offered investors risk

reduction. The premise behind these studies seeks to determine what role volatility

plays in determining commodity prices and the role volatility plays in determining

effective portfolio diversification strategies. This study will add to existing literature

by understanding the price volatility associated with silver spot market.

Hammoudeh et al. (2010) examined the conditional volatility and correlation

dependency and interdependency for the four major precious metals (i.e., gold, silver,

platinum and palladium. The results for the four metals system show significant short-

run and long-run dependencies and interdependencies to news and past volatility.

Furthermore, the exchange rate and federal funds rate are also included.

Behera (2012) examined price discovery and market efficiency in the Indian futures

and market using metal energy commodities. Sample data consist of daily futures and

spot closing price from 1st September, 2005 to 30th December, 2011 for gold, silver,

copper, and crude oil, and from 1st November, 2006 to 30th December, 2011 for

natural gas based on availability. Using co-integration and error correction

mechanism, the study finds the fair price discovery in the futures market.

Houston (2013) Traders study volatility history so that they can make informed

decisions on how to invest capital. The purpose of this article is to analyze implied

volatility values, which are derived from the investments price and are considered

the markets estimate of the investments actual volatility, for silver electronically

traded fund (ETF) options in periods of both high and low price movement.

16

Roache and Rossi(2009) studied methodology to investigate which and how

macroeconomic announcements affect commodity prices. Results show that gold is

unique among commodities, with prices reacting to specific scheduled announcements.

Other commodity prices, where such news is significant, exhibit pro-cyclical

sensitivities and these have risen somewhat as commodities have become increasingly

financialized.

Aggarwaland Sundararaghavan(2002) investigated whether the silver futures market

is efficient with respect to the information contained in the time series of daily price

changes. An analysis of the serial correlation of returns on silver futures supports the

hypothesis that successive price changes are independent.

Batten et al. (2009) examined the monthly price volatilities of four precious metals

(gold, silver, platinum and palladium prices) and investigates the macroeconomic

determinants (business cycle, monetary environment and financial market sentiment)

of these volatilities. Gold volatility is shown to be explained by monetary variables,

but this is not true for silver. These results are consistent with the view that precious

metals are too distinct to be considered a single asset class, or represented by a single

index.

Abanomey and Mathur (2001) examined that commodities provide risk reduction in

portfolios along with stocks and bonds.

Reuters T (2014) examined the investor activities, worldwide silver stocks and bullion

flows as well as a lucid and concise account of the financial, economic and social

factors underlying market trends.

Chow et al. (1999) suggested that commodities are in fact more attractive when the

general financial climate is negative.

17

Edwards and Caglayan (2001) demonstrated that commodity funds provide higher

returns when stocks perform poorly. This evidence suggests that the inclusion of key

commodity contracts should provide a positive contribution to more broad-based

financial trading and investment.

Gorton and Rouwenhorst (2006) focus on the behaviour of one of the most commonly

used indexes, namely the Goldman Sachs Commodity Index (GSCI). These authors

construct the equally weighted monthly GSCI index for the period 19592004 and

show that this index has the same risk premium as equities, although the actual risk

was less during the period investigated. Importantly, they point to a negative

correlation between the GSCI index and stocks and bonds.

Lee and Zyren (2007) compare the historical price volatility behaviour of crude oil,

motor gasoline and heating oil in US markets since 1990. Their results show that

volatility increased as a result of a structural shift to higher crude oil On November 3,

2009 the Central Bank of India purchased 200 metric tons of IMF gold.

Vrugt et al. (2004) and Chan and Young (2006) examined trading strategies in

commodity markets, included those inked to the business cycle. Our rationale in

choosing the explanatory variables for the present study largely follows these papers.

18

CHAPTER 3

RESEARCH

METHODOLOGY

19

3.1 Objectives of Study

a) To analyse the trend in silver trading in Indian stock exchange.

b) To study the relationship between silver prices and BSE SENSEX in India

3.2 Scope of the Study

The scope of the study was to understand the price movement of silver in specific

period, so it helps to take decision of buying and selling the silver in the market. The

scope of this project was limited to silver prices. The Project does not extend to any

other sector. This study provides a chance to know about various tools that are used in

the analysis. This study covers Price Movement of silver.

3.3 Research Methodology

E-view has been used in this project. E-Views (Econometric Views) is a statistical

package for Windows, used mainly for time-series oriented econometric analysis. It

is developed by Quantitative Micro Software (QMS) E-Views can be used for general

statistical analysis and econometric analyses, such as cross-section and panel data

analysis and time series estimation and forecasting.

E-Views combines spread sheet and relational database technology with the

traditional tasks found in statistical software.

In E-view i have used unit root test to check the whether the data is stationary or not.

Descriptive statistics was also used to calculate mean, median, standard deviation.

Correlation was meant to find the relation between BSE SENSEX and silver. The

cause or effect relation was needed to determine and for that Granger Causality Test

was applied

20

3.4 Hypothesis

The project aims to study the relationship between silver prices and BSE SENSEX in

India. The hypothesis was built to check the relationship and cause or effect relation

between BSE SENSEX and silver.to check whether BSE SENSEX affect silver prices

and silver prices affect BSE SENSEX.

Null hypothesis (H0): There is no significant relationship between silver prices and

BSE SENSEX in India.

Alternative hypothesis (H1): There is significant relationship between silver prices

and BSE SENSEX in India.

The significance level of the study is 0.05 that is 5%.

21

CHAPTER 4

DATA ANALYSIS AND

INTERPRETATIONS

22

This chapter is divided into two parts. First part incorporates the data presentation which

presents the trend of silver from 2010-2014 and the second part involves the testing of

hypothesis stated before through various tests and devising conclusions based on it.

Graphical representation of BSE returns and SILVER returns a) BSE returns 2010 BSE returns

9.8

9.7

9.6

9.5

9.4

9.3

9.2

9.1

9.0 1 2 3 4 5 6 7 8 9 10 11 12

Month

BSE returns of 2010 shows that there is a high growth in the BSE returns from february and

continued till it reaches 9.6 in may 2010. In September 2010 BSE returns was at its peak

point of the month.

23

b) Silver returns 2010

SILVER returns

6.8

6.7

6.6

6.5

6.4

6.3 1 2 3 4 5 6 7 8 9 10 11 12

Month

From the 1st

month of 2010 silver returns started to rise and reaches to 6.5 and remained

constant till March and then started to fall. In April silver returns reached to its lowest at

6.440. in November silver returns was at its peak with 6.7244.

24

c) BSE returns 2011

BSE returns

9.95

9.90

9.85

9.80

9.75

9.70 1 2 3 4 5 6 7 8 9 10 11 12

Month

In January BSE returns was at 9.71 and this is the lowest of the year 2011 and from February

returns started to rise. From March till April returns remained constant. BSE returns reached

its peak point at the end of the year that is in December

25

d)Silver returns 2011

silver returns

7.2

7.1

7.0

6.9

6.8

6.7

6.6

6.5 1 2 3 4 5 6 7 8 9 10 11 12

Month

In January silver returns was at 6.7 and was at its lowest point in February. From February

returns was rising at a constant rate without much fluctuations and reached the height of 7.19

in the end of the year

26

e) BSE returns 2012

bse returns

9.88

9.84

9.80

9.76

9.72

9.68

9.64 1 2 3 4 5 6 7 8 9 10 11 12

Month

The peak point of 2012 of silver returns id at 9.88 in March and from that point it started to

fall and reached its lowest point that is 9.641 in the month of December.

27

f) Silver returns 2012

7.6

7.5

7.4

7.3

7.2

7.1 1 2 3 4 5 6 7 8 9 10 11 12

Month

From the month of January silver returns was rising continuously and reached 7.55 in April.

From August to September the returns remained constant at 7.5 and the lowest point of silver

returns in 2011 is 7.17.

28

g) BSE returns 2013

bse returns

9.88

9.84

9.80

9.76

9.72

9.68 1 2 3 4 5 6 7 8 9 10 11 12

Month

The fluctuations can be seen almost at the end of every month. The month of May was the

month where the BSE returns are at their lowest point of the year that is 9.684. The highest

point is 9.889 in December 2013.

29

h) Silver returns 2013

silver returns

7.52

7.48

7.44

7.40

7.36

7.32 1 2 3 4 5 6 7 8 9 10 11 12

Month

In January silver returns were at 7.361. In February returns reached 7.407 and started to fall

and reached its lowest of the year in July at 7.323. From July silver returns were rising

continuously in a good speed and reached 7.489 which is the peak point of silver returns in

2013.

30

i) BSE returns 2014

bse returns

9.98

9.96

9.94

9.92

9.90

9.88

9.86

9.84

9.82 1 2 3 4 5 6 7 8 9 10 11 12

Month

The lowest point of BSE return is in the month August at 9.825 and the highest point is 9.96

in month October and December. The month starts with returns of 9.90 in January and from

February to march returns remains constant at 9.841.

31

i) BSE returns 2014

bse returns

9.98

9.96

9.94

9.92

9.90

9.88

9.86

9.84

9.82 1 2 3 4 5 6 7 8 9 10 11 12

Month

The lowest point of BSE return is in the month August at 9.825 and the highest point is 9.96

in month October and December. The month starts with returns of 9.90 in January and from

February to march returns remains constant at 9.841.

32

j) Silver returns 2014

silver returns

7.45

7.40

7.35

7.30

7.25

7.20

7.15

7.10

7.05 1 2 3 4 5 6 7 8 9 10 11 12

Month

In January returns are 7.406 and from that point returns are constantly falling and reached its

lowest of the year 2013 at 7.053 in July. Whereas the highest point of silver returns in 2013 is

7.406 in January.in the end of the year returns reached 7.10 in December.

33

k) BSE returns 2010-2014

BSE_RETURNS

10.0

9.8

9.6

9.4

9.2

9.0 5 10 15 20 25 30 35 40 45 50 55 60

Month

In January 2010 returns were 9.07 and in February returns fell down nd reached 9.05 and

started to increase and reched 9.6 in May.the ups and downs of BSE sensex in every month

has a significant impact on the BSE returns. From 2011-2014 returns reached at peak point of

9.88 in in the 60 th month of these 5 years that is December of 2014.

34

l) Silver returns 2010-2014

SILVER_RETURNS

7.6

7.4

7.2

7.0

6.8

6.6

6.4

6.2 5 10 15 20 25 30 35 40 45 50 55 60

Month

Silver returns are affected by the silver prices fluctuations from 2010-2014. In January 2010

the silver returns are 6.27. The peak point in these 5 years could be seen in 28th

month that is

April 2012 and the lowest point is January 2010

35

Unit root test a) BSE returns (probability

36

b) Silver returns (probability>0.05)

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -1.643890 0.4540

Test critical values:1% level -3.548208

5% level -2.912631

10% level -2.594027

*MacKinnon (1996) one-sided p-values.

The Augmented-Dickey test is a statistical procedure that examines for the presence of unit

roots on silver returns. The unit root test is conduced test on unit root at level and test

equation is intercept. Akaike Info criterion is taken with maximum lag of 10. Augmented-

Dickey test shows that t-statistics is -1.64 and since the probability is 0.4540 which is greater

than the significance level 0.05 so the null hypothesis is accepted

37

i) Graphical representation (p-value>0.05) SILVER_RETURNS

7.6

7.4

7.2

7.0

6.8

6.6

6.4

6.2 5 10 15 20 25 30 35 40 45 50 55 60

Month

The fluctuations shows that the data are not stationary when we use unit test on unit root at

level and test equation is intercept. Akaike Info criterion is taken with maximum lag of

10. The data is stationary when it has constant mean but in the above figure we can conclude

that data is non stationary

38

c) Silver returns (probability>0.05) at trend and intercept

t-Statistic Prob.*

Augmented Dickey-Fuller test statistic -0.694995 0.9686

Test critical values: 1% level -4.121303

5% level -3.487845

10% level -3.172314

*MacKinnon (1996) one-sided p-values.

The Augmented-Dickey test is a statistical procedure that examines for the presence of unit

roots on silver returns. The unit root test is conduced test on unit root at level and test

equation is Trend and intercept. Akaike Info criterion is taken with maximum lag of 10.

Augmented-Dickey test shows that t-statistics is -0.694995 and since the probability is 0.9686

which is greater than the significance level 0.05 so the null hypothesis is accepted.

39

d) Silver returns (probability

40

Granger Casualty Test Pairwise Granger Causality Tests

Null Hypothesis: F-Statistic Prob.

SILVER_RETURNS Does not Granger Cause

BSE_RETURNS 0.74794 0.4783

BSE_RETURNS does not Granger Cause SILVER_RETURNS 0.86787 0.4257

Since the F-statistic comes out to be more than p-value therefore null hypothesis is accepted.

This means that silver does not cause or effect on BSE returns and so as BSE returns does

not cause or effect on silver returns.

41

CHAPTER 5

CONCLUSION

42

Findings of the study The major findings of the study are the following:

a) Silver prices are affected by economic conditions of the country.

b) Futures markets for silver are weak form efficient.

c) Augmented Dickey-Fuller unit root test implied that the silver returns and BSE

returns are stationary.

d) Granger Casualty test inferred that silver returns does not cause or effect BSE returns

and BSE returns does not cause or effect on silver returns.

e) Investing in silver is a great way to make money, especially if someone is looking to

secure your future

f) Investors cannot earn abnormal profits in future if they wish to invest in silver.

43

Limitations The limitations of the project are: a) Daily stock indices are not taken for the study. b) Limited tests are used to check the stability of data. c) Due to time limitation only five years are taken to conduct this study.

d) Study examined the monthly average price volatilities.

e) The actual risk was less during the period investigated.

f) All economic factors were not taken under consideration.

44

RECOMMENDATIONS This chapter include recommendation emerging from the analysis of data and findings of

the study in consistent with the objectives of the study.

a) Investors who are interested in investing in silver should invest for a longer period of

time not for the short period as profit can be seen in long term only.

b) Price volatility depends on international market movement so invested is

recommended to keep a check on international market movement before investing in

silver.

c) The investor is recommended to check inflation before investing as well as after

investing in the silver as it was found that commodities like silver and gold etc are

having positive correlation with inflation so it become easier for the investor to

understand when to invest.

d) Investors should use trading strategy for building and diversifying portfolio as this

saves cost and time both.

e) For companies who are producing gold, silver is suggested to invest at Higher

Gold/Silver prices as it is having positive impact on Companies producing

Gold/Silver such as Barrick Gold, Newmount Mining & Anglogold Ashanti. Whereas

falling prices have an opposite effect.

f) Awareness programs should to be conducted by companies and industry so that

already aware customer can take the challenge to invest in silver future market

because since this was new to the market and also risky but gives good return. So it

can be done through by giving advertisements in local channels, Newspapers, by

sending E-mail to present customers etc

45

g) Investors should have a word with brokers before investing into silver as silver market

is a fluctuating market.

h) Investor should analyze the factors such as dollar appreciation or depreciation,

inflation, increase in money supply and all other factors affecting silver commodity

prices.

46

CHAPTER 6

REFERANCES

47

Journals:

a) Aggarwal, R. and Sundararaghavan, P.S. (1987). Efficiency of the silver futures

market: An empirical analysis study using daily data. Journal of Banking and

Finance, 11(1), 49-64.

b) Baharam, A., Chatrath, A., and Raffiee, K. (2006). Price discovery in the soybean

futures Bollerslev. T. (1986). Generalized autoregressive conditional

heteroskedasticity. Journal of Econometrics, 31, 307-327.

b) Ciner, C. (2001). On the relationship between gold and silver prices: A note.

Global Finance Journal, 12, 299-303.

c) Dickey, D.A. and Fuller, W.A. (1981). The likelihood ratio statistics for

autoregressive times series with a unit root, Econometrica, 49, 1057-1072.

d) Erb, C., and Harvey, C. (2006). The strategic and tactical value of commodity futures.

Financial Analysts Journal, 62(2), 69-97.

e) Glosten, L., Jaganathan, R. and Runkle, D. (1993): Relationship between the

expected value and volatility of the nominal excess returns on stocks, Journal of

Finance, Vol. 48, 1779-1802.

f) Kat, H.M., and Oomen, R.C (2007). What every investor should know about

commodities, Journal of Investment Management, 5, 1-25.

g) Nelson, D.B. (1991). Conditional heteroskedasticity in asset returns: A new approach,

Econometrica, 59, 347-370.

h) Solt, M.E. and Swanson, P.J. (1981). On the efficiency of the markets for gold

and silver. Journal Business, 54(3), 453-478.

48

c) Taylor, S.J. (2005). Asset price dynamics, volatility, and prediction. Princeton, NJ:

Princeton University Press.

d) Workings, H. (1949). The theory of price of storage.American Economic Review,

39(6), 12541262.

Books:

a) Richard A. Ferri, (1980), Price volatility in the silver futures market, United States.

b) Carley Garner A Trader's First Book on Commodities, 2nd

Edition

WEBLINKS:

a) http://www.indexmundi.com/commodities/?commodity=silver&months=300&curre

ncy=inr b) http://www.moneycontrol.com/stocksmarketsindia/ c) http://en.wikipedia.org/wiki/Silver_as_an_investment d) http://indianstocks.wikia.com/wiki/Organizational_Structure_of_Bombay_Stock_Ex

change e) http://www.commodityonline.com/advisory/silver/2/4929/ f) http://tejas.iimb.ac.in/articles/80.php 23 march 2015/

g) http://www.academia.edu/5551458/Price_volatility_in_the_silver_spot_market_an_e

mpirical_analysis_an_empircal_analysis_using_GARCH_applications