Do Soaring Price and Mounting Demand in Indian Gold Market Speak of a Paradox?

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Do soaring price and mounting demand in Indian gold market speak of a paradox?

Submitted on: 30/07/2010

Case study

This case clearly and systematically explains the causes and effect of increasing demand of gold in India and helps to analyse the changes in demand curve. Gold has always been a driving force in history. India is the largest gold consumer country accounting for 25% of the total demand of gold. Our aim is to analyse various determinant that operate demand. Generally, it is seen that festivals like Diwali, Akshaytritya and marriages increases the demand of gold. This case present the condition where in 2008, people switched off their funds to gold as global economy was under recession. This condition increased the demand for gold and kept the price of gold relatively high as well. Hence, it presented the paradox to soaring price and mounting investment demand for gold. Whereas,this condition was not seen in the case of jewellery. The demand of gold jewellery started falling when the prices were high.

Tables and Figures For reference

TABLE 1|  |  |
Year| Price of gold| Quantity of gold demanded|
1991| 8518| 271|
1992| 9629| 371|
1993| 11481| 314|
1994| 12222| 428|
1995| 12962| 514|
1996| 13333| 556|
1997| 12222| 771|
1998| 12000| 871|
1999| 12222| 813|
2000| 12592| 813|
2001| 13703| 800|
2002| 15925| 628|
2003| 17777| 600|
2004| 19259| 685|
2005| 20370| 813|

Study of demand in case of Gold

Demand is willingness to purchase. There are various factors which are considered for analysing the demand for a particular commodity. These factors are known as Determinants of Demand. The factors are: 1. Price factor

2. Non Price factors

Demand is the function of price and non price factors.

Qd= f( Price factor, non price factor)

Law of demand
The relationship between Price and quantity is represented in a graph which shows Demand curve provided that we keep all other non price factors constant. The inverse price quantity relationship indicating that a greater commodity is demanded at lower prices and a smaller quantity at higher prices is called as Law of Demand.


Case 1: Paradox to law of Demand
Facts for investment based demand of gold
In 2005 gold prices went up and also the demand increased. (Refer Table 1) Reasons:
1. Future Value: The higher goes the price for gold, the stronger became the conviction of Indians that gold is the best way to enhance one’s wealth. 2. Geopolitical uncertainty: This conviction got even stronger during the recession. Everyone switched their investments to gold thus making the demand for gold go up. 3. Inflation: In 2009, the demand for gold increased as the investors expected it to raise more which in turn increased the gold prices. 4. Portfolio Diversification: It is observed that Gold has a negative correlation with stock market and therefore it is seen as an inflation hedge.

Demand curve (keeping non price factor constant)

This positive relationship between price and quantity demanded is mainly due to non price factors which are explained in detail in later section. (Refer Influence of non price factors)

Case2: Demand for jewellery based investment
* In October 2008 the demand went up because the prices for gold went down. * In 2007 the prices for gold went up and so the demand for gold jewellery decreased. * During recession where the investment based demand was increased, the jewellery based demand saw a huge dip because of the high prices. * In Feb. 2009 platinum was less than half the price it was in 2008. So people started buying platinum instead of gold, as the gold prices were still rising. This substitution effect increased the market share for platinum.

Demand curve of gold jewellery

(Fig: Change in quantity demanded)...
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