Principles of Economics: Factors Affecting Gold Prices in India

This report analyzes the various factors that influence the price of gold in the Indian market. It begins by identifying key drivers of gold demand, including inflation, global market movements, government gold reserves, the jewelry market, and interest rate trends. The report then examines the impact of gold imports on India's current account, noting the moderate inelasticity of gold demand. Furthermore, the report explores the effects of taxes on the gold market, highlighting how taxes disrupt supply, buyer's welfare, and resource allocation. The analysis includes graphical representations to illustrate supply and demand dynamics, elasticity, and the impact of taxes. The conclusion synthesizes these factors, emphasizing the roles of the global market, inflation, and government reserves in shaping gold prices, and reiterates the inelastic nature of gold demand and the tax burden distribution. The report references several academic sources to support its analysis.

Running head: PRINCIPLES OF ECONOMICS
PRINCIPLES OF ECONOMICS
Name of the Student
Name of the University
Author Note

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Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................2
Conclusion..................................................................................................................................6
References..................................................................................................................................7

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Introduction
In India, Gold is considered as one of the precious metals, that has been used by the
individuals for the symbol of purity, royalty etc. From the year 1990, there is an increase in
the demand of the Gold in the Indian market, a strong economic growth and the prices are
favorable. Both the demand of monetary and non-monetary for gold is being increasing day
by day. Due to this there is a drastic increase in the prices of gold from the year 2001. In this
report, all the factors that affected the prices of the gold will be discussed and also presented
graphically so that it is very helpful to understand.
Discussion
Q1(a). The five factors that will affect the demand for gold in India are described below:
 Inflation: Most of the investor try to invest money on gold compared to the currency as it
is steady and does not fluctuate that much and it also hedge inflation. Thus, the inflation
for gold is high and as the demand increases.
 Global movement: As India is one of the largest importers of gold, at the time of
importing prices it changes due to the global movement (Bhalotra, Chakravarty and
Gulesci 2020) . There is a high chance that because of the various financial products and
for political upheaval gold is considered as one of the safest assets in which the investors
can rely on.
 Government Gold Reserves: In most of the countries, the Central Bank use to control
both the gold reserves and currency. Thus, when the gold reserves are being hold by the
Central Bank then the prices of gold are rising (Mishra et al. 2019). Two of the examples
of the two largest economies are Reserve Bank of United States and Reserve Bank of
India. Thus, the cash flow in the market increases and supply of gold tends to decrease.

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GS
GD
E
Gold
Rate
Quantity of Gold
demanded in India
0
P*
Q*
E’
P’
Q’
GD’
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 Jewelry Market: In India, there are several occasion in which the demand of gold rises at
a time, it leads to a mismatch in demand and supply. Gold is usually used as a jewelry
article in India and it has a power of strong hedging against the inflation that is rising
(AnjanaRaju and Marathe 2017). Thus, due to this the prices of the gold rises and there is
an increase in domestic demand so the import of gold also increases.
 Interest Rate trends: The demand of gold does affect the interest rate of the financial
products. In India, gold prices are considered as a good indicators of the trend in interest
rate.
Figure 1: Gold market in India
(Source: Kannan and Dhal 2008)
Q2(a). Importing of Gold has a great impact upon the current account of India. Gold is
considered as one of the important financial asset in which investors invest their money on it.
There are different motives in which the individuals use gold and the wat investment is

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GD
B
Gold
Rate
Quantity of Gold
demanded in India
0
P*
Q*
A
P’
Q’
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happening it also change the persistence (Raza et al. 2016). It can be observed that the
demand for the import of the gold bars is relatively inelastic in respect to the original price, in
both the short run and long run and there is increase of tariff rates that will not help in
reduction of non-monetary forms of gold stability. In the long run, there is more demand of
gold compared to short run and the effect of expenditure is very much strong for the gold
jewelry as there is a very little change in the import expenditure and it is moderate sensitive
to the expenditure movements.
Q2(b).
Figure 2: Moderate inelasticity of gold demand in India
(Source: Ghosh 2016)
From the above diagram it can be observed that, the rate at which the price of the gold
rate is increasing, the quantity demanded of gold in India is decreasing in a much slower rate.

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So, it can be observed that as price of the gold is increasing the demand for gold is gradually
decreasing. Thus, there is moderate inelasticity can be seen in the demand of Gold in India.
Q3. Taxes leads to market inefficiencies by disrupting supply, buyer’s welfare and
disrupting allocation of resources. By imposing tax rates on goods, there is displacement in
the level of demand price and supply price in the market system. Tax wedge is created by
imposition of different tax rates by the government. The excess price created by the tax rate is
borne both by the buyers and seller participating in the market system (Gangopadhyay, Jangir
and Sensarma 2016). As the portion of the tax rate is borne by the buyers and sellers in the
market, this excess cost leads to inefficiency in the market. However, the division of tax
payments between the buyers and the sellers depends on the nature of demand and supply
elasticity in the market. In addition to this cost structure differences, tax imposition leads to
fall in consumers as well as producers’ surplus (Guha and Bandyopadhyay 2016). The
portion reduced from consumers and producers’ surplus is added to the government’s wealth
account, which is sent to the government as revenues from tax imposition. However, a
portion of the loss in consumer and producers’ surplus is disappeared. This leads to
deadweight loss in the market system (Jain and Biswal 2016). This implies transfer of
spending power from the individuals to the public sector of a country. Therefore, no party or
institution gains from the loss in surpluses.

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GD
E’
Gold
Rate
Quantity of Gold
demanded in India
0
P*
Q*
E
Pt
Q’
GS
GSt
Buyers
Burden
Seller’s
Share
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Figure 3: Effect of tax on gold demand in India
(Source: Mukherjee, Mukherjee and Das 2017)
From the above graph that is presented, it can be seen that the tax burden on the
buyers is much more compared to the supplier. Thus, the quantity demanded of gold is
decreasing as the gold rate is decreasing.
Conclusion
From the above analysis, it can be considered that factors like global market, inflation
and the gold reserves of government affects the price of the gold in India. There is moderate
inelasticity in the demand of gold in India as the rate in which the price increases, the
quantity demanded is decreasing in much lower rate. The tax burden is more on the side of
the buyer compared to the seller, so there also there is shift in the supply curve as the demand
is also decreasing.

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References
AnjanaRaju, G. and Marathe, S., 2017. Impact of crude oil prices in China, India and USA on
the gold prices.
Bhalotra, S., Chakravarty, A. and Gulesci, S., 2020. The price of gold: Dowry and death in
India. Journal of Development Economics, 143, p.102413.
Gangopadhyay, K., Jangir, A. and Sensarma, R., 2016. Forecasting the price of gold: An
error correction approach. IIMB management review, 28(1), pp.6-12.
Ghosh, A., 2016. Determinants of Gold Demand in Reserve Bank of India's foreign exchange
reserve portfolio. Economics Bulletin, 36(4), pp.1929-1937.
Guha, B. and Bandyopadhyay, G., 2016. Gold price forecasting using ARIMA
model. Journal of Advanced Management Science Vol, 4(2).
Jain, A. and Biswal, P.C., 2016. Dynamic linkages among oil price, gold price, exchange rate,
and stock market in India. Resources Policy, 49, pp.179-185.
Kannan, R. and Dhal, S., 2008. India's demand for gold: some issues for economic
development and macroeconomic policy. Indian Journal of Economics and Business, 7(1),
p.107.
Mishra, B.R., Pradhan, A.K., Tiwari, A.K. and Shahbaz, M., 2019. The dynamic causality
between gold and silver prices in India: Evidence using time-varying and non-linear
approaches. Resources Policy, 62, pp.66-76.
Mukherjee, P., Mukherjee, V. and Das, D., 2017. Estimating elasticity of import demand for
gold in India. Resources Policy, 51, pp.183-193.

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Raza, N., Shahzad, S.J.H., Tiwari, A.K. and Shahbaz, M., 2016. Asymmetric impact of gold,
oil prices and their volatilities on stock prices of emerging markets. Resources Policy, 49,
pp.290-301.