ANALYSING THE PRICE ELASTICITY DEMAND OF GOLD AND ITS SUBSTITUTE IN INDIA-This case details about the price elasticity of demand with relation to gold

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ANALYSING THE PRICE ELASTICITY DEMAND OF GOLD AND ITS
SUBSTITUTE IN INDIA
The Demand for gold is a prevalently observed fact around the world where Indian sub-
continent alone shares 25 percent of global gold and is the largest consumer occupying 2nd
position in consumption Gold next to China. Among all the gold mines in India “Hutti Gold
Mine Company” located in Karnataka is the only company that is involved in mining and
processing of the gold ore. Over the past few years India has been recycling an average of 105
tons of gold per annum. Festivals like Diwali and Akshaya Tritiya in India are the main factors
which increase the Demand for gold. It is known that economic measure which shows change in
the quantity demanded when price changes is called price elasticity of Demand. So price
elasticity concept can be used to deter consumption of gold by the people of India.
People in India most probably invest in gold because of culture and belief, so the demand
for it always remains inelastic. In the year 2004 most of the Indians consumed more and gold
with increased income even when the price for gold was increasing. With this, the price of gold
increased to higher range increasing the imports of gold. Many factors other than the price such
as price of related goods, consumer preference and expectation, income of the consumer were
also responsible for the increase in the price of gold
When gold is taken in Microeconomic perspective, it is considered to be the wealth
conserver since its increase in value over a period of time. This particular phenomenon precisely
shows how gold increases the fortune of the Individual and the economy. In the other way In the
Macroeconomic Perspective, Gold takes 12% of our total imports next to Capital Goods and
Crude Oil from the chief producers of Gold in this world. They are USA, China, Australia,
Russia and South Africa. We compensate them in their respective currencies are in US
Dollars amounting to 6000crores per year. This makes our currency cheaper and increases fuel
rates. Another reason that is considered is, the nature of gold in not productive is that it stays
diligent in the bank lockers most of the time.
It is clear from above reasons that government is forced to intervene in the import of gold
by restricting it in quantity, increase in the import duty and checking the illegal mining. These
actions are taken in particular to make economy stable and steady. Hence gold was inelastic

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demand good which had no substitute goods at that particular period. Moreover, gold also have
a high income elasticity of demand as people with high income will be willing to buy a lot gold
ornaments.
Policies of Government was most appropriate to control the price in the short run but
later in the long run the Demand for the gold reduced only to an extent as substitute product had
its role to play. The substitute product for gold was platinum .Platinum had the same demand as
that of gold as it was almost equal to the price of gold and ornaments made from gold were also
made in platinum in the same manner. Most of their properties were similar; gold was used in
industrial purpose in various forms of its oxides while platinum was replaced by palladium for
most of the industrial purpose.
The price for ten grams of platinum was relatively higher than the gold in the last decade
and it became similar in the recent year which shows that the demand for gold remains
unchanged though there are substitutes for it. This shows that demand for gold among the Indian
customers continues to be the same in spite of platinum being a substitute to it. Therefore
Demand for gold is” inelastic” always with regard to the Indian customers even when price
changes.

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REFERNCE:
Periyasamy, Dr Sivasamy. (2016). A Case Analysis on Demand and Supply of Gold in
India. EPRA International Journal of Commerce and Management Research. 1.
www.economictimes.indiatimes.com, article “Gold demand remains muted; discounts
in India narrow”, dated Sep 16, 2016 by Reuters
Questions:
1. What are the other factors that influence the price of gold in India and how does
that impact the demand for gold?
2. Whether platinum satisfy all factors to substitute gold in the long run? if so
explain in brief
1.(Ans): Various factors that influences price of gold other price in India are price of related
goods, consumer preference and expectation, income of the consumer, government policies,
illegal mining and marketing of gold etc. Evens though the price of gold increases due to
various factors the demand for gold never reduces in India and This is because there are
very few good substitutes for gold and consumers are still willing to buy it even at relatively
high prices. The price elasticity for gold always remains inelastic.
2.(ans): Platinum doesn’t satisfy all the factors to substitute gold as in India most probably
invest in gold because of culture and belief, Platinum had the same demand as that of gold
as it was almost equal to the price of gold and ornaments made from gold were also made in
platinum in the same manner but that the demand for gold remains unchanged. It is because
Gold is believed to be the most ideal product that can be stored as a wealth conserver in the
bank. Even in the long run demand for gold remains inelastic as it has very rare substitute
but it may be substituted by lower grade gold of its kind.

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