do soaring price and mounting demand in indian gold market speak of a paradox?

7/27/2019 Do Soaring Price and Mounting Demand in Indian Gold Market Speak of a Paradox?

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CASE-ANALYSIS

Do Soaring Price and Mounting

Demand in Indian Gold Market

Speak of a Paradox?

Group 7

Sonal Teotia (164) Sonam (165) Sudeshna Gupta (168) Suhaas Sharma (169)

Sumit Choudhary (171) Suvrit Chadha (176) Vaibhav Bansal (183)


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Introduction

The case deals with the uncertain demand and price of goldin the Indian market which has been affected by price &non-price factors.

There is a huge demand of gold for various festivalslike Diwali & Akshay Tritiya.

Gold is a commodity which represents status symbol.

India ranks as the largest consumer of Gold globally,accounting for 26% ofWorlds Gold demand.

Over the past three years, Gold investments have exceededequity savings by a factor of 11.


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Demand Theory

Dx = f ( Y , Px , Ps , Pc , T , Ep , Ey, N , D , U )

Dx = Demand of goodY = Income of individualPx = Price of goodPs = Price of substitutePc = Price of complement goodsT = Taste and preferences

Ep = Expectation of future pricesEy= Expectation of incomeN = Number of consumers in the marketD = Distribution of consumers in the market

U = Uncertainty


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Law of Demand

When other factors areconstant,

The law of demand

states ;Dx = f ( Px )

i.e. when pricedecreases, demand for

the commodityincreases and viceversa, when otherfactors are constant


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Why Indians buy Gold?

A Big Majority of 35% BUY for Auspicious events like Marriages,Festivals, Baby Naming Ceremonies etc.

26% BUY it as an Investment or for Value Creation for the Family

[Rural India has a higher skew towards life events while urban Indiais skewed towards investments]

18% Backup for Bad and Rough Economic Times [ Say, your kid isin 12th and you need to pay hefty capitation fee for Professional

course, Gold comes in handy if Equities etc. are all beaten down]

15% Gifting Ideas

6% Just fond of Gold and Impulsive BUYING


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When and on What Occasions do

Indians BUY Gold ?Two-thirds of households usually buy gold jewellery for life events. Therest is as shown in the Pie-Chart below:


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Gold as an Investment

Gold is used for hedging against risks, inflation, downturns.

India has one of the highest saving rates in the world 30% out of which

10% invest in gold.

Rural India does not have access to Banks. Gold is used to convert black money into white.

Lack of equity culture in India- Mutual Funds, Bonds, Equity

The trend is that in long term, gold generally gives return around 9-10%.

Gold is considered as a safeinvestment.


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Price Trends of Gold


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0

5000

10000

15000

20000

25000

30000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Price(Rs./10g

ms)

Year

Price of Gold in the past decade


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Rising investor appetite for gold post

2008 crisis


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Gold as a safe haven

The rising demand of gold ETFs in the wake ofthe 2008 crisis, shows that investors see gold as

safe investment Net inflows in gold ETF have increased by 4.5

times in fiscal 2010 compared to fiscal 2010

This has created additional demand in spite of

decrease in consumption of gold jewelry


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Demand of Gold over the decade


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Diwali - 2008

Diwali was on 28th October


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Diwali 2011

Diwali was on 26th October


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Observations

During Diwali time of 2008, demand of goldincreased with decrease in the price for gold.(Law of Demand applicable)

In the year 2011, during Diwali, demand increasedwith the rise in price of gold.(Law of Demand is NOT applicable)

Non-price factors plays an important role indetermining demand and price of gold in Indianmarket.


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Non-Price Determinants

Income of the customer

Price of related goods

Consumers tastes & preferences Growing middle class Population

Expected future prices of the good

External factors, e.g. monsoon

Weakness in currency


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Analysis

1. The year 2004 saw a rapid growth in income of average

Indian which resulted in more spending on consumer good

including gold. Thus there was a growth in demand for gold.

2. A study conducted in 2006 by the world Gold Council states

that gold has become a more relevant and desirable product

to a greater number of women.

3. In year 2009, price of platinum has come down from Rs

35000 to Rs 22000, so many Indian buyers started to buy

platinum over gold.

Price Effect = Substitution Effect + Income Effect


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Conclusion

It appears as a paradox that demand and price ofIndian Gold market is NOT exactly following the law ofdemand.

As the price of gold increased, the demand for it alsoincreased.

But after careful analysis of the price and demand of gold

by considering non price factors also, we can concludethat gold is following the law of demand.


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References

http://www.jagoinvestor.com/2012/01/gold-price-movements-analysis.html

http://freepress.in/26/why-when-indians-buy-gold-consumption-in-2011/

http://www.gold.org/investment/statistics/gold_price_chart/

http://goldpricenetwork.com/gold-price-history/?country_id=368&mm=10&yy=2008

Managerial Economics, 6E by Dominick Salvatore, Ravikesh Srivastava


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do soaring price and mounting demand in indian gold market speak of a paradox?

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