India has a huge market for gold. The country takes up to 25% of all the worldwide demand for gold. The huge demand is associated with the use of gold in cultural practices like traditional weddings. There are other factors other than the demand for gold that affects the equilibrium price of gold. The World Gold Council reports that income is a major determinant of the demand for gold. A percentage increase in gold causes an increase in the demand for gold by 1%. The gold price also is another determinant of the price of gold. An increase in the prices of the gold by 1% leads to a reduction in its demand by 0.5. It is important to keep the levels of demand and supply of gold controlled to achieve price equilibrium.
Factors influencing gold demand
Differences in consumer tastes and preferences influence the rate of demand of a commodity. In the case where the customers of a commodity prefer using the commodity due to the satisfaction they get, there is an increased demand. High preference of gold in India has led to high demand for gold in the country. Indians have multiple uses of the gold such as the use of gold as a security for their businesses. The increased use has led to high demand for gold. Increase in demand is attributed to the increased need by the consumers to use the product by the customers. Decreased commodity demand may be linked to the fact that there is lack of preference for the product by the customers. Low demand is attributed to the fact that the customers do not feel the need for acquiring the commodity.
Consumers’ expectations of the future commodity prices are a major determinant of the market demand. Increased purchases of gold have been registered in India have been recorded in periods before cultural ceremonies. Indians anticipate that the prices would rise during the ceremony seasons and prefer to purchase gold before hence the increased demand In the case where the consumers expect the market prices of a commodity to rise, the consumers will buy more of the commodity now to cater for the future needs. The case leads to an increase in the consumer demand. When the consumers expect the market prices to drop, the consumers buy little of the commodity so that they buy more of it in the future. The case leads to a decrease in the demand of a commodity.
The consumer numbers that are present in the market greatly influence the commodity demand. A market characterized by large numbers of consumers has a high level of commodity demand. The high numbers of the population in India means an increased need for gold and hence an increased demand for gold. The case is explained by the fact that an increase in the consumer numbers translates to an increase in the need for the commodity hence an increase in commodity demand. Low numbers of consumers in a market translates to low levels of consumer demand.
Demand changes and gold price
Demand decrease
A decrease in demand for gold during the off cultural activity season in India translates to an excess in supply keeping the initial price. The fall in demand means that consumers are willing to consume a less amount of what the producer supplies. The gap that is left between the demand and the commodity supply will lead to a reduction in both the quantity and the prices of the commodity.
Demand increase
Increase in demand for gold in India leads to the development of an excessive demand at the initial prices. The producers, in this case, are not willing to produce an amount of commodity that equals the demand. The excess demand, in turn, translates to increased commodity prices. The price increase will also lead to increase in the commodity output.
Factors influencing supply
The cost of production of a commodity directly relates to the level of commodity supply. An increase in the cost of production of a commodity translates to low commodity supply. Increased cost associated with gold purification has reduced the supply of gold in India. The producers, in this case, produce low amounts of the commodity due to the higher costs tied to the production. A low cost of production translates to higher levels of production. The case is explained by the fact that at low production costs, the producer feels the incentive to produce much of the commodity.
The market prices influence the commodity supply. Increased commodity prices will offer the producers the incentive to produce more and supply to the market in order to make more profits. During the ceremony seasons in India, the suppliers of gold into the Indian market increase their supply due to high-profit margins. A producer will produce and supply less of a commodity to the market when there are low commodity prices in the market. The producer, in this case, will lose the incentive to produce more of the commodity due to the low levels of profit margins associated with the sale of the commodity.
The level of technology used in production is another factor that influences production. The use of the modern technology in production will lead to increased levels of production and hence increased commodity supply. The use of modern gold purification methods has led to the production and supply of more gold into the Indian market Use of the old technology of production means a low rate of production and hence low market supply.
Natural conditions like weather conditions in the production of agricultural products do affect the level of market supply. During the period when there are good weather conditions there is a higher level of production and hence high product supplies in the market. Bad weather conditions restrict the production environment and hence low supplies.
Supply changes and gold price
Supply increase
Increase in the amount of a commodity delivered to the market translates to the creation of an excess supply. The difference between the higher levels of supply and the lower demand levels is the supply surplus. The excess supply will cause a fall in the levels of the commodity price which after a while will lead to higher demand levels. An increase in the supply of gold in the Indian markets will cause a fall in the gold prices.
Supply decrease
A supply decrease causes an increase in the commodity demand at the initial price levels. The excessive demand will cause an increase in the commodity prices and also a decrease in the level of commodity output. A decrease in the supply of gold in the Indian market during the high gold demand season leads to increased gold prices.
Changes in both demand and supply
In the occasion where there is an increase in the commodity supply and a decrease in the levels of the commodity demand, the equilibrium price falls. The explanation for this is that the producers accept lower prices of commodities since the consumers already have attached the goods a lower value, therefore, a decrease in price. In the case where there is an increase in the supply of gold and fall in the gold demand in India, there will be a fall in the prices of gold.
Increase in the consumer demand and decrease in producer supply translates to an increase in the equilibrium price. Consumers value the commodities highly and are willing to purchase them at higher prices set by the producers.
The same directional change in both the demand and supply curves leads to an undetermined change in price. In the occasion of an increase in both the demand and supply of a commodity, the changes in prices depend on the relative changes in the 2 factors. In the other occasion where there is a decrease in the commodity supply and demand, the price change depends on both the degree of changes in both demand and supply. A change in the price of the gold cannot be determined when the changes in both the demand and supply change in the same direction.
Graphical representation of equilibrium price
Price Supply
Demand
Source (Author 2018) Quantity
- Equilibrium price of the commodity
-Equilibrium quantity of the commodity
In conclusion, equilibrium gold prices are determined by both the demand and supply forces. The level of equilibrium price of gold is determined by both the demand and supply of gold. A change in the levels of demand or supply leads to a change in the equilibrium price level. To achieve the equilibrium price you have to adjust both the demand and supply of gold to a level where the forces equate.
Reference
Sunil D., “Factors that affect gold price” Retrieved on (Jun 25, 2018): https://economictimes.indiatimes.com/wealth/invest/factors-that-affect-gold-price/articleshow/64464960.cms
