Economics Commentary - Even though there is a weak trend in global markets, the price of gold has increased in the Indian markets

by nithil (student)

International Baccalaureate Economics

School Code: 003528-011

Name of School: Johnson Grammar ICSE and IBDP

Name of Candidate: Nithil Chigullapally

Candidate Number: dqt

Title of Article: Gold up by Rs 25 on strong demand; silver down by Rs 800

Source: Economic Times

Date of Article: March 3rd 2012

Commentary Date: 9th July 2012

Section: Micro/International

Word Count: 661 words

Economics Commentary

The gold prices have been constantly increasing in India due to the spot demand before the marriage season, currency movements and the traditional investment patterns. The constant depreciation in the Indian currency and a change in government policies are supporting a steady rise in the price of gold. Earlier, there was a flat rate of Rs. 300 for 10g on gold. But now, due to the change in the government policy on import duties, 2% is charged on 10g of gold. This change in the government policy will increase the import duties on the metal to nearly a double, increasing its prices. Gold is denominated in US Dollar; change in the value of US Dollar will hence reflect the price of gold. The steady depreciation in the value of US Dollar due to the ongoing recession has led to a weak trend in gold in the global markets. If the price of gold is valued higher in any other currency, it shows us that the demand for gold is high and hence increasing its value. The below graph shows the depreciating value of gold due to the depreciation of US Dollar.

Even though there is a weak trend in global markets, the price of gold has increased in the Indian markets due to the high pick up on spot demand ahead of the marriage season. The price of gold has gained Rs. 25 from Rs. 28, 245 per 10 grams. ETF in India saw the highest net outflows in last 52 months. Investors observe recovery in stock markets which helped gold prices increasing.

This high trend of gold in the Indian market can be explained as an exception to the law of demand i.e. the increase in the price ...

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This high trend of gold in the Indian market can be explained as an exception to the law of demand i.e. the increase in the price of gold is increasing the demand for the metal. Indians are the biggest buyers of gold in the world. Gold imports reached 958 tons in 2010, and in 2011 gold imports were still high despite the increase in prices. Gold can hence be considered a Veblen good. A Veblen good is one whose demand continues to rise in spite of an increase in its price level. Therefore the normal law of demand is not applicable here. Such goods are known as goods of conspicuous1 consumption because people regard them as status symbols and there is an inherent passion towards this precious metal.

A normal demand curve slopes left to right downwards. But as shown in the diagram above, the demand curve slopes upward, and when the price of increases from P to P1, the quantity demanded increases from QD to QD1. Hence, gold can be considered as a Veblen good.

Although, the prices of silver is facing a weakening trend in both the Indian and the global markets due to the same ongoing recession. Silver has fallen by Rs. 800 from Rs. 57,700 per Kg in the Indian market and by USD 6.70 from USD 1704.60 in the global market. The below graph shows a fall in the prices of silver in the global market. In the Indian market, silver doesn’t have high value status as much as gold. This is because people do not have a high inherent passion towards silver. Almost all electronics are configured with silver. The precious metal is used in everything from automobiles to alternative energy needs. But due do the reduced off take by industrial units, silver is facing a fall in both demand and its prices.

Even though the weak trend in silver, the demand for silver coins has been the same as the people in India buy these coins for good luck and prosperity.

In conclusion, gold and silver are both facing a weakening trend in the global market due to the world economic uncertainties. But, in the Indian Market, gold is having a high trend whereas silver has a weak trend. As gold is continued to be purchased high in India due to its snob value status.

A Tighter Regulation

Gold and silver are the two most popular commodities traded on Indian commodity bourses.
FMC may ask exchange to tighten monitoring and receive weekly data on trade volume.
National commodity exchanges say such measures will help strengthen investor trust in the market.
The only downside of stricter regulation is that it may reduce bullion trading volumes.