CASE STUDY

DO SOARING PRICE AND MOUNTING DEMAND IN INDIAN GOLD MARKET SPEAK OF A PARADOX?

GROUP-3

SUBMITTED TO:
DR.SAMIK SHOME

SUBMITTED BY: AKASH SINGH JAPPREET KAUR PRASEETHA

SUKUMARAN SUBEESH KUMAR S SUJITH KUMAR V

INTRODUCTION: The demand for Gold is widespread throughout the world. The major demand for gold comes from five major countries namely India, Italy, Turkey, US and China, which accounts for 55% of the total gold demand across the world. India only consumes about 25% share, which shows the demand for gold among Indians due to the involvement in cultural and religious traditions. In India there is huge mismatch between demand and supply for gold. In India Hutti Gold Mine Company is the only producer of gold which amounts for 3 tonnes per year and through recycling jewellery scrap, over the past five years 105 tonnes of gold has been recycled. This couldnt meet the demand so India imported around 700 tonnes of gold every year.

FACTS
1. From the experts view the demand for the gold is now turned on the side of investments apart from jewellery demands. Because people feet that investment on gold would be safer. 2. In India the demands for gold has been compensated by the imports of gold. But the reports states that from the year import of gold in India falls by 83% in December 2008 , in 2009 it falls by 91 % and by February to march of 2009 the import becomes zero. This infers that the trend of the people changes to the investment on gold rather than jewellery works. 3. The market price of the platinum has increased from 10% - 15% to 25% - 40% by January 2009, also the price is reduced to Rs.22000 from Rs.35000.

DETERMINANTS OF DEMAND As discussed in the case study, the demand of a commodity depends upon the two factors: 1. PRICE FACTOR-(PRICE OF OWN COMMODITY) 2. NON-PRICE FACTORS-(OTHER FACTORS).

PRICE EFFECT The demand for product depends upon the price of the own commodity, other factors remain constant. It says as the price increases, the demand decreases or vice versa. It is shown with the help of DEMAND SCHEDULE and DEMAND CURVE from the data given in this case study.

DEMAND SCHEDULE( I) A demand schedule is a table showing the quantity of a gold that consumers are willing and able to purchase over a given period of time, while holding constant all other variables on which demand of gold depends(ceteris paribus assumption).
YEAR PRICE OF GOLD(INR) QUANTITY OF GOLD DEMANDED(TONNES)

2000 2001 2002 2003

12,592 13,703 15,925 17,777

813 800 628 600

NOTE:- Comparison of data from year 2000-2003 using the price of gold and quantity demanded as shown in the information given in case study.

DEMAND CURVE (I):

EXPLANATION:- As shown in the above demand curve has a NEGATIVE SLOPE showing the LAW OF DEMAND i.e. as the price increases, demand decreases or vice-versa. On the y-axis price of gold is given and on the x-axis quantity demanded is given. As shown in the demand curve, as the prices in the year 2000-2003 increases the quantity demanded in the respective year decreases.

DEMAND SCHEDULE(II):

YEAR
2003 2004 2005

PRICE OF GOLD(INR)
17,777 19,529 20,370

QUANTITY OF GOLD DEMANDED(TONNES)

600 685 813

NOTE:- Comparison of data from year 2003-2005 using the price of gold and quantity demanded as shown in the information given in case study.

DEMAND CURVE (II):

NON-PRICE EFFECT: The demand for gold is also affected by some other non-price factors. The following are the non-price determinants which affect the demand of gold in India. 1. 2. 3. 4. 5. INCOME OF THE CUSTOMER PRICE OF RELATED GOODS CONSUMER TASTE AND PREFERENCES POPULATION EXPECTED FUTURE PRICE OF GOODS 1. INCOME OF THE CUSTOMER:- It studies the relation between the change in income and change in quantity demanded of gold. If the income of the customer increases, the purchasing power also increases which leads to increase in demand for gold or vice-versa. For example-In 2004,the Indians had a rapid growth in income which lead to spend more on consumer goods including gold. Suppose the income of the consumer is Rs.100000 and the price of gold is 20000 and demand for gold is 10 tonnes. So,when the income of the consumer rises from 100000 to 200000,being the price remaining constant, the demand also increases from 10 tonnes to 20 tonnes.

EXPLANATION:- In the above demand curve, the price of gold is shown on the y-axis and demand for gold is shown on the x-axis. As the income increases, demand also increases showing a rightward shift in the demand curve. 2. PRICE OF RELATED GOODS:- Demand of gold is also affected by the price of other goods. SUBSTITUTE GOODS:- Substitute goods are those goods which can be used in the place of each other. For example:-tea and coffee. If the price of one commodity increases, the demand for other commodity also increases or viceversa (showing the direct relation). In this case study, it is given that as the price of platinum falls in 2009, the demand for gold also falls, as the Indians started substituting platinum for gold

D LEFT WARD SHIFT P D RIGHT WARD SHIFT

DEMAND (GOLD)

DEMAND (PLATINUM)

COMPLEMENTARY GOODS:- Complementary goods are those goods which complete the demand for each other. For example:- car and petrol, mobile and

simcard. It always show the inverse relationship between price of one commodity and demand for other commodity. 3. CONSUMERS TASTE AND PREFERENCES:- Demand for those commodity increases for which consumer develop taste. Consumer taste depends upon the trend, type of customers, age, sex etc. Therefore a favourable change in the taste will shift the demand curve to the right and unfavourable change in the taste will shift demand curve to the left. In India,the demand for gold is related with cultural and religious belief. Indians have ruinous love for gold and consider as a status symbol. Thats why during festivals and marriages, demand always increasing beside the fact that price is also increasing. 4. POPULATION:- The size and composition of population also affect the demand for a commodity. If the population increases, demand also increases or vice versa. In India, the population is so large which affects the demand for gold to sum up to a large quantity. This rising rate of population is also a reason for the increase in demand for gold even when the price is high. 5. EXPECTED FUTURE PRICES OF GOOD:- Expected future prices also affect the demand curve. If the consumer expects that price in future will rise, then he will demand more in present at existing price. Likewise if he hopes that the price in future will fall, then he will postpone his demand. In this case study, the expectations about the increase in gold prices has made the investors to invest more in gold even if the price is high. In 2008, during global recession also made investors to switch their fund from distressed financial assets to ever-alluring gold.

CONCLUSION: 1. Gold is the product that follow the Law of Demand, it can be inferred that in 2007 Diwali period the gold price has increased to $800 so the demand for it went down and in 2008 diwali period the demand for gold increased so the prices slashed from $900 to $712. So, it shows as the price increases, demand decreases or vice-versa. 2. Gold also contradicts the Law of Demand it can be inferred from 2005 report that the gold price has increased but at the same time the demand for gold also went up i.e. the demand curve inverted. This phenomenon proves that the gold is an exceptional product for the Law of Demand. In 2008 due to recession in US all the country faces the recession problems, but still then the demand for the gold is in steep along with the price. The fall of the gold imports in India also indicates that platinum the subsidiary of the gold is getting popular among the Indian customers. Because the platinum price has been decreased and now it is nearly equal to golds price

The impact of the income i.e. salary margin and income is also one of the prime factors that affect the demand curve of the gold The above fact is due to the non pricing factor i.e. customers taste and preference are changing. The culture is also an important factor that affects the golds demand curve because nowadays Akshatya tritiya has changed the people to get gold on those days which in turn also increase the price of the gold. So, it shows that as the price increases, demand also increases and vice-versa. At the end, we can say that IT IS A PARADOX. Because in this case study, in some years it follows law of demand as well as it in some years contradicts law of demand.