STUDY OF VARIOUS FACTORS

AFFECTING THE DEMAND AND

SUPPLY OF GOLD GOLD

SUBMITTED TO:

MR SRIKANT IYENGAR

PREPARED BY:

HIMANSHU V SHAH

SHAILENDRA KHIRIYA

NIRAV AJMERA

ASHWIN

CHAITALI CHAUHAN
Table of Contents
Table of Contents.............................................................................................................................2
Scope of the project.........................................................................................................................3
1. GENERAL STUDY OF DEMAND AND SUPPLY OF GOLD JEWELLERY........................4
1.1 Comparison of Demand of gold in the past twelve months...................................................4
1.2 Effect of income range on the demand of gold......................................................................5
1.3 The stock of gold jewellery kept by the retailers...................................................................5
1.4 Expectation of gold prices in the coming months..................................................................5
2. REGRESSION ANALYSIS OF THE DATA OF SALES OBTAINED FROM A SUPPLIER
OF GOLD TO JEWELLERY MANUFACTURERS AND RETAILERS.....................................7

2
Scope of the project
The main purpose of the project is to study the effect of various factors on the supply and
demand of gold.

The analysis of the project is done at the micro level. At the micro level a primary research was
done by interviewing the jewellery retailers, whole sellers and also gold suppliers through
questionnaire. The various factors considered in the study were the market conditions, the
general trend, income of the individuals, seasonal effects in the demand of gold.

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1. GENERAL STUDY OF DEMAND AND SUPPLY OF GOLD
JEWELLERY
1.1 Comparison of Demand of gold in the past twelve months.
Most of the retailers and gold suppliers have experienced a tremendous increase in the sale of
gold this year as compared to previous years.

On being asked the months in which the sale of the gold was the highest, the respondents said
that the highest demand was in the time between October-December 08’. The main reasons
behind this were as follows:

 The stock markets have witnessed a sharp decline starting the last quarters of 07’ and the
early quarters of 08’. Sensex was rock bottom in the November month and the figures as
low as 8000. As a result of this people started losing confidence in the stock market and
started taking money out from the stock market and putting it in the commodity market
i.e. in gold and gold. The price of gold at that time was in the range of 18000-20000 per
kg. But unlike the other goods the supply of jewellery cannot be increased to a great
extent and hence the price of gold started rising to bring the demand down.

 Also Diwali was one of the reasons for the sale of gold to be highest in these months as it
consider auspicious to buy jewellery on Diwali.

The next highest demand was in the months of February and May 09’ which was mainly
attributed to the marriage season.

October and November months of this year were the third highest in sale which again was
attributed to Diwali. But the sale this year was comparatively higher as compared to the October
and November months of the previous year due to the following reasons:

 With the increasing investment in the gold market, demand started increasing but the
supply could not be increased to meet the demands. Hence the prices started increasing
and the prices reached as high as 26,000 in the September month and 27,000 in the first
half of October.

 Also starting April 09’ the stock markets has also started consolidating showing an
upward steep. As a result of this investors started investing in the stock market again and
hence the demand started falling down. Thus the price of gold had started falling by the
end of the month with the price of gold close to 25,000 per kg.

In the rest of the months of this year the demand has been fairly constant.

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1.2 Effect of income range on the demand of gold
Most of the retailers said that the maximum chunk of the customers in their opinion is in the
annual individual income range atleast of 5lacs-10lacs. This shows that the preference of gold is
more in upper middle class and rich class.

1.3 The stock of gold jewellery kept by the retailers

 Most of the small retailers purchase gold regularly. The reason for this is that they donot
have too much of disposable money with them hence they cannot afford to stock at the
start of month. Hence, what they normally do is that on the basis of the sale done
regularly, they put an equivalent amount in buying of gold.

 However, the bigger retailers do purchase at the start of the month. The amount of gold
purchased by them was found to be consistent with the amount of gold sold.

1.4 Expectation of gold prices in the coming months

Most of the respondents believed that the prices would stay close to around 25,000 per kg in the
coming months. They do not expect a sharp rise or a sharp fall in the coming months. The
reasons for this can be as follows:

 The markets have started consolidating and the worst part of recession is now complete.
It has been seen from the years Jan 02’ to Jan 09’ period that the prices have been
increasing steadily at a high rate. The reason for this is that the markets were growing in
this period and hence the people had the purchasing power to invest in gold resulting in
the increase in prices.

 The sharp increase in the prices from Jan 07’ to Jan 09’ period due to the recessionary
cycle. However since the recession is now at the verge of ending the prices will again
follow the earlier trend of slow and steady increase in prices.

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6
2. REGRESSION ANALYSIS OF THE DATA OF SALES
OBTAINED FROM A SUPPLIER OF GOLD TO JEWELLERY
MANUFACTURERS AND RETAILERS
2.1 The data of sales of past thirteen months i.e. October 08’ to October 09’

Following are the figures of a gold supplier to gold jewellery retailers and manufacturers.

Months Prices(Rs/kg) Sales (in

kgs)
Oct-08 20634 428
Nov-08 21,975 452
Dec-08 21544 410
Jan-09 19135 455
Feb-09 21826 425
Mar-09 22233 445
Apr-09 21030 480
May-09 22625 411
Jun-09 23220 335
Jul-09 22269 315
Aug-09 23456 305
Sep-09 26582 340
Oct-09 27172 372

On carrying out the regression analysis of the above data the results obtained are as follows:

SUMMARY OUTPUT

Regression Statistics
-
0.59057
Multiple R 6
0.34878
R Square 1
Adjusted 0.28957
R Square 9
Standard 49.0185
Error 4
Obs 13

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ANOVA
df SS MS F Sig f
Regressio 14155. 14155 5.891 0.0335
n 1 93 .93 387 75
26430. 2402.
Residual 11 99 818
40586.
Total 12 92

Uppe
Coeffici Standar P- Lower r Lower Upper
ents d Error t Stat value 95% 95% 95.0% 95.0%
749.180 145.35 5.154 0.000 429.26 1069. 429.2 1069.
Intercept 2 31 207 316 01 1 601 1
- - - - -
X Variable - 0.0064 2.427 0.033 0.0296 0.001 0.029 0.001
1 0.01555 06 22 575 5 45 65 45

Thus the regression equation comes out to be as follows:

Sales =749.102-0.01555*price

The demand schedule on the basis of this regression model is as follows:

price(p) estimated sales

19135 451.5457525
20634 428.2433
21030 422.09172
21544 414.0928
21826 409.7103435
21,975 407.39075
22233 403.3737185
22269 402.823404
22625 397.288848
23220 388.03722
23456 384.3563795

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 26582 335.749723
27172 326.5774

The regression line drawn on the basis of the estimated schedule is as follows:

 However the co-efficient of co-relation comes out to be -0.59 ≈ -0.6

Thus the inferences that can be made from the above fact are as follows:-

1. The value of r≈0.6, which means that the price and the quantity demanded are negatively
co-related. Hence the increase in price leads to the fall in demand. Thus the law of
demand is satisfied.

2. However the values of r= -0.6 and r square=0.348781 are very less and hence we can say
that the impact of demand of gold jewellery on the price is comparatively less than that
of the gold bullion trading on the prices. The reason behind this can be that apart from the
price the demand of the jewellery is largely affected by the seasonal variations. The
seasonal variations in this case are as follows:

 High sale in the month October 09’ despite of the high prices because of Diwali.
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  Also starting from the months of February the sales gradually increase till April as the
marriage season is approached.

FACTORS AFFECTING GOLD PRICE

• High Inflation: In times of high inflation, people tend to invest in commodities, GOLD being

the most popular among all commodities. This is also the time when the economy and stock

market or mutual fund investments do not do well and GOLD investments can provide a good

hedge for your investment portfolio.

• Low interest rates: This is somewhat similar to the above factor. When the interest rates are

low (as compared to the inflation), especially less than the inflation, then the demand for

GOLD increases.
• Human sentiment: This is an irrational but significant and the most difficult to predict factor

which can influence the price of gold. Because of this factor it is also easier to have 'temporary

GOLD bubble'.

Tightening of gold supply

Gold mining is decreasing and the demand for gold is increasing. Gold supply has
decreased by almost 40 per cent as the cost of mining, legal formalities and
geographical problems have increased which has led to a fall in gold mining. Economics
have taught us that lesser the supply, greater the demand and in turn greater the
increase in price.

Inflation and interest rates

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Gold has always been considered a good hedge against inflation. Rising inflation rates
typically appreciates gold prices. It has an inverse relationship with interest rates. As
gold is pegged to the US dollar, US interest rates affect gold prices. Whenever interest
rates fall, gold prices increase. Lowering interest rates increases gold prices as gold
becomes a better investment option vis-a-vis debt products that earn lower interest.
Gold loses its shine in a rising interest rate scenario.

Currency fluctuation

As gold is pegged to the US dollar, it has an inverse relationship with the dollar. Right
now with US being in great financial turmoil, the dollar has weakened against many
other currencies. Dollar is expected to weaken further and prices of gold are expected
to rise further. Dollar is a de-facto currency of exchange around the world. But now with
US on the brink of depression, gold is substituted as a safe haven for investments.
Though dollar seems to be getting stronger, it may be a temporary effect and very soon
it can head southwards once again, in turn making gold an attractive and safe
investment.

Geo-political concerns

Whenever there is geo-political strife, investors around the world rush to prevent erosion
of their investments and gold as a safe haven attracts one and all. For example after
9/11 terror strike in the United States the demand for gold had increased. With the
recent events like tension between India-Pakistan, Israeli strikes over Gaza, the
ongoing war in Iraq, the tension between US and Iran coupled with recession have
investors scrambling for gold.

Central bank demand

With the dollar losing its value, central banks of most of the developed countries have
started to increase their share of gold. This explains the increasing market demand for
gold.

Weakness in financial markets

General rule of thumb in the market is that gold is always attractive when all other
investments are unattractive. Why is this? As gold is negatively co-related to stocks,
bonds, and real estate, gold is considered to be a safe haven and hence during any
crises, investors would like to sell off what they would term as risky investments and be
invest the funds in gold.

Weak US Dollar:

Projections about a declining dollar due to an ever-increasing twin deficit supported by many investment veterans are met by
much denial from politicians as well as from investors. As long as foreigners are willing to pour in the amount of $2 billion
dollars every working day, the dollar won't crash. But if foreign confidence were to wane, the US dollar will be heading south.
No matter how you look at the US twin deficits and America's future fiscal liabilities, this problem is huge and some painful
adjustments not only seem to be necessary but unavoidable as well. It should be obvious that one of these major painful

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adjustments will be a massive devaluation of the US dollar. It seems that the idea of a dollar devaluation is gaining support
from the Fed when the President of the Dallas Fed, Robert McTeer recently said: "over time, there is only one direction for
the dollar to go - lower." Former ECB president Wim Duisenberg, quoted by Spanish Newspaper El Pais, recently said: "A
dollar devaluation seems inevitable due to the tremendous US Current Account deficit." Furthermore he recently said on
Dutch television that we can only hope and pray for a smooth economic transition in the US. Why is this so important?
Simple, the US dollar is the key driver for Gold; as the dollar goes, so will gold; but in the opposite direction. Gold is the anti-
dollar with a high inverse correlation to the dollar! In the end, gold is still a monetary asset and trades like a currency.

Growth in Demand for Jewelry:

Inspite of the convergence of Diamond and Palladium, the demand for gold jewelry has seen a regular growth year on year.
Countries which are primarily responsible for this growth are India, China, Italy, Turkey and the USA. The demand for
consumption of gold in jewelry was 6% higher at 735 tonnes and also comprised a new first-quarter record. The US, which
accounts for 10 % of world gold demand, is also one of the markets where public taste in gold jewelry is enjoying a
renaissance. The renewed interest in gold also extends to Japan, a market which showed a 19% increase in demand. The
Indian market " the world's largest for gold demand " was 23 % higher following the marriage and festival period which, in
turn, has led to restocking by retailers. The earthquake in India, however, is unlikely to hit demand significantly as it occurred
in an area which comprises only 5% of the total Indian consumption. There were sharp falls in demand in Turkey and
Taiwan - down 38% and 31% respectively. This was due to economic difficulties and continued weakness in investment
demand.

Increase in demand for exchange traded paper backed products:

For the first time in history, gold can be purchased like any listed stock at select stock exchanges of the world like London
Stock Exchange, Australian Stock Exchange (Gold Bullion Securities) and New York Stock Exchange (StreetTracks Gold).
The World Gold Council initiated Electronic Traded Funds have displayed very good performance and growth in volumes
since launch.

Factors affecting gold prices in last 3 years:

If we analyse the track record of gold in the past three years, we can conclude that gold prices have seen a steady and
impressive northward growth. In January 2002, gold prices per 10 gm stood at Rs 5,453. By November 2004, the price had
gone up to Rs 7,005. The year 2004 has indeed been a great year for gold. There has been a substantial increase in gold
prices, but this has not dampened consumers inclination towards investments in gold. In fact, investors have begun to
recognize the effectiveness of gold as an efficient savings vehicle and an alternate asset class.
The graph below is indicative of the quarterly price of gold in Indian rupees per 10 grams from November 2002 to November
2004 showing the upward movement.

Note: Figures on the Y-axis indicate

currency in INR
The following table gives us the all-time high gold prices touched in the period, Jan 2000 to Nov 2004.
All time high
Year Amount (Month of all time high)

2000 4,629 (February)

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 2001 4,812 (October)

2002 5,669 (December)

2003 6,576 (December)

2004 7,005 (November)

In 2004, gold prices saw a slight dip in April 2004, only to pick up again in July 2004.
Globally, the price of gold has historically been impacted primarily by the US dollar. However in the past few years, oil
prices, the US dollar and the demand-supply equation for gold have become equally significant contributors to the price of
gold.
Gold as investment
Demand for gold for the purpose of investment has outpaced the demand for the yellow metal for jewelry in 2004. Indians
purchased 74.0 tonnes of gold for investment from January to September 2004, while it was 67.8 tonnes during the same
period in 2003.
While the advantages of having gold in an investor's portfolio has been talked about time and again, 'what should be the
amount of investment' is always a question asked by the investors. There are two schools of thought on this subject. The
recommendations are in the range of a 15% to 20% allocation of the total portfolio.
• 15% of the investment portfolio.European Central Bank decision at the time of establishment in 1999 based on
internal studies.
• 20% of the investment portfolio. Based on a model done by Germmill & Hillman on 20 years data.

Ideally however, allocation to gold from an investment perspective should be based on comprehensive financial planning. It
should always be remembered that investment in physical gold must always be in the form of coins/bars and should be in
addition to the jewelry held by the household. Advantages of gold in a portfolio can be explained through the following
points:
• Gold has a low to negative correlation with most other asset classes.
• An investment portfolio with an allocation to gold improves the consistency of portfolio performance during both
stable and unstable periods.
• The price of gold is not linked to the performance of economy, industry or companies.
• Gold offers the benefit of diversifying portfolio risks.

Let us consider an example where an investor invests Rs 10,000 each in various options like equities, fixed deposit, PPF
and gold in March 1999. Let us see what the returns are in each case, taking the deposit period from 1999 - 2004 into
consideration.
In gold, by March 2004, his investment would have fetched him Rs 15,063, a substantial increase.
The money invested in PPF would have grown to Rs.16,025 by March 2004. A fixed deposit of the same amount would have
yielded Rs 13,794 by March 2004. (Refer to the data below for varying interest rates)
By March 2004, his investments in equities for the same amount would have become Rs 18,916. This is provided the
investor had remained invested in the market throughout the five years, even during periods when the Sensex saw huge
downward movements.

Fixed Deposit Rates PPF Rates

Year Interest Rate Capital (Rs) Year Interest Rate Amount (Rs.)

1999 7.50% 10,000 1999 12%10,000 (Capital)

2000 7.25% 10,750 2000 11% 11,200

2001 7.00% 11,529 2001 9.50% 12,432

2002 6.50% 12,336 2002 9% 13,613

2003 5.00% 13,138 2003 8% 14838

2004 4.75% 13,794 2004 8% 16,025

Fixed deposit rates/ PPF sourced from a nationalised bank

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 Gains on Gold Gains on BSE Sensex
Year Gold Price YoY Rise/Drop Amount Year Sensex YoY Rise/Drop Amount
(Rs.) Rise/Drop (%) (Rs.) Rise/Drop (%) (Rs.)

1999 4,296 123 3 10,000 1999 start 3,065 1,941 63 -

2000 4,419 (79) (2) 10,286 1999 close 5,006 (1,034) (21) 16,332

2001 4,340 733 17 10,104 2000 3,972 (710) (18) 12,867

2002 5,073 674 13 11,810 2001 3,262 115 4 10,577

2003 5,747 727 13 13,379 2002 3,377 2,462 73 10,947

2004 6,474 - - 15,063 2003 5,839 575 10 18,916

Source: World Gold Council
2004 6,414 - - 20,769
Source: BSE

Cost efficient ways of investment in gold internationally

Owning gold has been possible over the years in the form of mutual funds or stocks of gold mining companies. However,
investors have been awaiting a more cost effective platform for owning gold. The World Gold council recognized this fact
and launched the following ETF gold products across the world.
Gold Bullion Securities

For the first time in history, gold was made available at the stock exchange just like an equity share to the investors through
a World Gold Council initiated ETF product called Gold Bullion Securities. Each share of Gold Bullion Securities (GBS) is
equal to 1/10th of an ounce of gold and is supported by physical holding of gold in the custody of HSBC. This is the first time
ever that a metal has been listed on an international Stock Exchange and can be conveniently traded or invested by
institutional investors as well as individuals. GBS is listed on the London Stock Exchange and also the Australian Stock
Exchange.
At present GBS is the most cost efficient way of investing in gold, as a potential investor has to only pay 0.3% p.a. as
management fees, which includes the cost of storage and insurance apart from the "brokerage" that they have to pay to the
brokers.

Gold price hinges on money supply

By Saudi Gazette Staff

JEDDAH – Gold price has a positive correlation with money supply growth, according to a new empirical study
produced by the World Gold Council, a fact that is extremely pertinent in today’s environment of elevated money
supply growth. Moreover, money supply growth tends to precede gold price increases by 6 to 9 months.
As money supply increases, gold price rises. This trend is upheld by the quantity theory of money which illustrates
that money supply has a direct, positive relationship with the price level. It shows divergences caused by inflationary
expectations may last for a very long time, even decades, but the long-term price of gold is driven by global money
supply.
The paper also shows that a surge in the price of gold is an advance signal of higher velocity of money and,
consequently, future inflation pressures. The findings of the paper, “Linking Global Money Supply to Gold and Gold to
Future Inflation, suggest that investors may be justified in their concerns that quantitative easing measures will lead to
an increase in the velocity of money and in turn inflation, give
In the WGC analysis for the month of January this year, if also noted that changes in the US money supply do not
solely explain the changes in the price of gold.
“On the contrary, gold is impacted by many factors world-wide and as such, money supply changes in places like
India, Europe, and Turkey also have an effect on its performance,” said Juan Carlos Artigas, WGC investment
research manager based in New York and author of the report.
In particular, a 1 percent change in money supply in the US, the European Union and United Kingdom, India, and
Turkey tend to correlate to an increment in the price of gold by 0.9 percent, 0.5 percent, 0.7 percent, and 0.05
percent, respectively.
Gold is an indicator of future velocity of money, in particular in the US, the report said.
“In other words, the gold price can be interpreted as a signal that the market expects the velocity of money to
increase, thus raising future inflation pressures,” he added.
Gold is a leading indicator of velocity and therefore inflation, it noted, adding that despite a large output gap around

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the world and anemic economic recovery, investors are justified in their concern that quantitative easing policies
resulting in rapid money supply growth will eventually lead to an increase in the velocity of money and of inflation.
Many central banks across the globe base their monetary policies using the principle that inflation can be regulated
by the amount of money supply pumped into the economy, the report said.
It is mostly accepted that as the velocity of money increases, this creates inflationary pressures in the economy,
holding everything else constant. When the global economy started to contract as a result of the financial crisis, most
central banks needed to use unprecedented measures to veer the economy away from a global depression. These
included lowering benchmark rates to record lows and adopting quantitative easing in one form or another.
However, these same measures are prompting fears that inflation may loom on the horizon. A common, albeit
simplistic, way to measure the velocity of money (not an easy task) is to compare the gross domestic product of a
country to money supply.
In other words, one compares the output an economy is producing relative to the money available. Using this simple
approach, we compare the price of gold versus velocity of money in the US and find that, gold is usually a leading
indicator of such a measure, with an average 1-year lag. In other words, a gold price increase can be interpreted as a
signal by the market that the velocity of money and thus, inflation, may raise in the future.
A simple empirical regression model illustrates that a 10 percent increase in the price of gold tends to increase the
velocity of money in the US by about 0.4 percent in 12 months time.
Hence, the present price of gold is a signal that the market is expecting velocity to pickup in a year, on average.
On Thursday, gold, which typically trades opposite the dollar, fell $49, or 4.4 percent, to settle at $1,063 an ounce. It’s
the lowest gold has traded since early November.
One of the reasons why movements in the price of gold precede changes in velocity has to do with the fact that GDP
is used to compute velocity. An increment in money supply to reactivate the economy does not translate in an
immediate GDP growth, the report indicated.
As future growth starts fuelled by the availability of money, it increases velocity with a lag. Thus, creating future
inflation may follow. “Empirically, we observe that a increase in the price of gold can also be interpreted as a signal by
the market that velocity may rise in the future which in turn can produce inflation forward,” Artigas said.
However, a more interesting result is that a 6-month to 9-month lag in money supply growth increased the
corresponding correlation to a range of 0.15 to 0.4.
In other words, there is evidence that money supply growth has an impact on future gold performance.
The report also analyzed the impact of money supply in Canada, Japan, Australia, China, Russia, and Brazil to the
performance of gold, without statistically significant results once the effect of the other countries was taken into
consideration. There were two main reasons for this.
For some countries like Canada, Japan, and China, the effect of their money supply considered in isolation showed a
positive relationship with respect to gold.
However, once other countries were included in the model, their effect was no longer statistically significant. This
was, in turn, a byproduct of high correlations between money supply of the countries considered (or the so-called
multicolinearity), so the extra variables were redundant. – Querubin J. Minas __

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