ON THE CASE
“DO SOARING PRICE AND
MOUNTING DEMAND IN
INDIAN GOLD MARKET SPEAK
OF A PARADOX?”
Demand for gold is widespread observable fact around the world,In which India’s share alone comes to
around 25%.Hutti gold mine company located in karnataka is the only company in india which produces
gold by mining and processing the gold ore.Over the past 5 years;Indians have recycled an average of 105
tonnes of gold per annum.
In october 2008,demand for gold increased;celebrations like diwali and Akshaya Tritiya was the main
factor for this vast increase in demand. Imports for gold started falling from december 2008 by 83%
followed by 91% in january 2009.In march 2009 imports were ZERO.In 2005,demand went up and price
also went up.Indian people tend to invest in gold because of culture and belief,so the demand always remain
elastic.In 2004,indians enjoyed a rapid increase in income,which made the indians to consume more and
more gold eventhough the price was increasing. Certain non-price factors like income of the consumer,price
of related goods,consumers tastes and prefrences,population and expected future price of the good also
effects in the increase in price of gold.
Later on in the year 2009,platinum which is a substitute good for gold started declining from Rs.35000 to
Rs.22000 which made people of india to purchase platinum as a substitute good for gold.
Indian consumer are ready to pay any price for gold.Cultural and religious traditions involving wearing of
jewellery play a major role in influencing indian gold demand,this foundness for gold is acting against “The
law of demand” because of this the price does not determine demand as gold comes under luxury goods and
people think of it as more of a status symbol and a valuable investment.
The desire and willingness to own a commodity (goods/services) and the ability to pay for it is termed as
Case: The demand in the case is for Gold. There exists a desire for Gold in Indian market, with most of the
people having the desire, willingness and ability to purchase it. But it is observed that the pattern of the
consumption and the range of price don’t always follow the Law of Demand.
LAW OF DEMAND
It states the price varies inversely as the quantity of consumption of a commodity.
It is the representation of factors which determines the quantity demanded of a commodity with respect to
its price and other factors is known has the Demand Function.
It can be mathematically expressed as:
Qd=F[price, non-price factor(income, population…..)]
In this Case, the Demand Function of Gold can be expressed as:
Qg=Quantity of Gold demanded.
Pg=Price of Gold
Y= Income of the consumer
F= Expected future price of Gold
T=Consumer’s Taste and Preference
Generally, according to the aforesaid law, if price of Gold increases, its demand decreases, but in Indian
market demand for Gold increases then price increase
Since, in the graph we can state that in the Indian market for Gold, the demand for Gold increases as well as
DEMAND CURVE AND SHIFT IN DEMAND CURVE
DEMAND CURVE: It shows the relationship between quantity of good the consume wants to buy and price
of the goods.
DEMAND SHIFT CURVE: The shift of a demand curve takes place when there is a change in any of nonprice factors, resulting in a new, shifted demand curve. NPF are those things that will cause the shift of the
demand curve, even if price remains the same.
But in Gold case the demand & supply are increasing due to price & non-factor determinant. So, the shift
occurs & with supply curve.
The demand schedule is the tabular representation of quantity demanded of a commodity at different pricelevels.
Case : In the exhibit during 1991-92,1992-96 & 2003-05 that as price of Gold increases the demand of Gold
in Indian market also increase (i.e.) the law of demand is not followed. In years 1999-2000 the change is not
following law of demand. However during the period 1992-93, 1998-2003, as the price of Gold increases,
the demand for Gold decreases, So during this period the market follows the law of demand. The same
happens in the years (1996-98).
In Economics, two or more goods are classified by examining the relationship of demand schedules when
the prices of one commodity changes it affects the price as well as the demand for another commodity.
When the price of one commodity increases, the demand for its substitute will increase because consumers
look for alternative(s).
In this case, the substitute goods are “Gold” & “Platinum”. Since the Gold’s price is increasing the demand
for platinum is increasing since, the consumer were buying/preferring platinum.
This conviction started manifesting itself again towards the last quarter of 2008 when the US-orginated
worldwide recession drove investors to park their funds in the safe havean of gold,thus keeping demand for
gold high.The uncertain economic conditions resulting from the global recession in 2008 has also made
investors switch their funds from distressed financial assets to ever-alluring gold.