Economics Assignment:

Do Soaring Price and Mounting Demand

in Indian Gold Market speak of a
Paradox?

By:

Harshit
Khetan
Sec: B
10BSP0115
 Demand Schedule for Gold
Year Price Quantity Elasticity
Demanded
1991 8518 271 2.829139
1992 9629 371 0.7988057
1993 11481 314 5.6251837
1994 12222 428 3.318679
1995 12962 514 2.8548565
1996 13333 556 4.6406358
1997 12222 771 7.1406036
1998 12000 871 3.5994663
1999 12222 813 0
2000 12592 813 0.1812314
2001 13703 800 1.3258978
2002 15925 628 0.3833865
2003 17777 600 1.6993309
2004 19259 685 3.2392098
2005 20370 813 N/A

Regression

Regression Statistics
Multiple R 0.45957
R Square 0.21120
Adjusted R Square 0.15052
Standard Error 3082.08346
Observations 15.00000

ANOVA
Significanc
df SS MS F eF
33064337.4172 3.4807
Regression 1 33064337.41728 8 4 0.08481
123490099.9160
Residual 13 5 9499238.45508
156554437.3333
Total 14 3
 P
Coefficient Standar t valu Lower Upper Lower Upper
s d Error Stat e 95% 95% 95.0% 95.0%
14623.9
Intercept 8894.12 2652.23 3.35 0.01 3164.32 2 3164.32 14623.92
X Variable 1 7.66 4.10 1.87 0.08 -1.21 16.52 -1.21 16.52

Analysis on the Non Price determinants of Demand for Gold

1991 – 1998

Gold demand in India increased by an annual compound rate of around 15%

from 1990 – 1998 during the period of liberalization with growth slowing
thereafter. The demand for gold was also high due to the Indian GDP growth
rate (5.5%) and high income elasticity.

And, it was expected to increase thereafter also, but it either remained static or
decreased.

Source: World Gold Council – Research on Deregulation of Gold in India by

Himadri Bhattacharya.

1999 – 2000

A good year for agriculture resulted in good demand for gold even though the
price increased. 70% of Indian population lives in rural India where agriculture
is main activity and is not taxed thus, 65 – 70% of gold purchases are done
from rural areas. If the agricultural income would be taxed, the disposable
income would reduce substantially resulting in lower gold demand.

In rural areas, the women folk have a low level of education. Hence, the rural
male invests more into gold so that womenfolk can encash their wealth without
legal hassles and having to deal with strangers.

As, 1999 and 2000 saw good agricultural income the demand was good for gold
even though the price increased.

Source: India’s Love for gold by Pinank Mehta

2001

As in 2001, marriage ceremonies and festivals gained importance in India, and

people were ready to spend more on these occasions due to the high savings
and income which came due to globalization, the demand for gold too was
substantial even though priced increased heavily. People were ready to spend
more on gold for both jewellery and investment as they had high income and
savings.

And, also a good monsoon season gave the rural people good income and high
opportunities to buy gold.

Source: The Hindu (02 Sept’ 2001). Article by Ramnath Subbu.

2002 – 2003

Losses and stock markets, political reasons and low imports which came up
due to the terrorist activities lead to a downfall in demand for gold. People
suffered huge losses in stock markets leading them with very low income or
savings and thus not going ahead to buy gold.

The prices too increased at a high rate and as people suffered losses, and the
political reasons lead to the low demand for gold in these years.

Source: Gold Prices may further rise by K.S. Chawla.

2004 – 2005

Promotion of jewellary such as World Gold Council’s Speak Gold Campaign,

good winter harvest for the farmers and increase in the number of dealers and
retail outlets led to the high demand for gold in India which decreased for the
last 2 years.
As, stock markets gave bad impression about the investment in the previous
years and the gold prices too were increasing helped the people in india to
invest easily in gold leading to its high demand in these years.

Source: Investment Demand for Gold by Mike Shedlock and www.gold.org