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)

Introduction
The case deals with the uncertain demand and price of gold in the Indian market which has been affected by price & non-price factors. There is a huge demand of gold for various festivals like Diwali & Akshay Tritiya.
Gold is a commodity which represents status symbol. India ranks as the largest consumer of Gold globally, accounting for 26% of Worlds Gold demand. Over the past three years, Gold investments have exceeded equity savings by a factor of 11.

Demand Theory
Dx = f ( Y , Px , Ps , Pc , T , Ep , Ey , N , D , U )
Dx = Demand of good Y = Income of individual Px = Price of good Ps = Price of substitute Pc = Price of complement goods T = Taste and preferences Ep = Expectation of future prices Ey = Expectation of income N = Number of consumers in the market D = Distribution of consumers in the market U = Uncertainty

Law of Demand
When other factors are constant, The law of demand states ; Dx = f ( Px ) i.e. when price decreases, demand for the commodity increases and vice versa, when other factors are constant

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 India is skewed towards investments]

18% Backup for Bad and Rough Economic Times [ Say, your kid is in 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

When and on What Occasions do Indians BUY Gold ?

Two-thirds of households usually buy gold jewellery for life events. The rest is as shown in the Pie-Chart below:

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 safe investment.

Price Trends of Gold

Price of Gold in the past decade

30000

25000

Price (Rs. /10gms)

20000

15000

10000

5000

0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Year

Rising investor appetite for gold post 2008 crisis

Gold as a safe haven

The rising demand of gold ETFs in the wake of the 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

Demand of Gold over the decade

Diwali - 2008

Diwali was on 28th October

Diwali 2011

Diwali was on 26th October

Observations
During Diwali time of 2008, demand of gold increased with decrease in the price for gold. (Law of Demand applicable) In the year 2011, during Diwali, demand increased with the rise in price of gold. (Law of Demand is NOT applicable) Non-price factors plays an important role in determining demand and price of gold in Indian market.

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

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

Conclusion
It appears as a paradox that demand and price of Indian Gold market is NOT exactly following the law of demand. As the price of gold increased, the demand for it also increased.

But after careful analysis of the price and demand of gold by considering non price factors also, we can conclude that gold is following the law of demand.

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