Paper

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Arth Prabandh: A Journal of Economics and Management

Vol. 4 Issue 7 July 2015, ISSN 2278-0629, pp. 59-79
An Analysis of Gold Price Variation and Its Impact on Commodity Market in

India
1.Dr. Bimal Jaiswal
Senior Lecturer, Department of Applied Economics, University of Lucknow, Lucknow, Uttar Pradesh, India.
Email: jaiswal_b@lkouniv.ac.in
Mob: 09453033262
2. Ms. Shiva Manoj
Research Scholar, WISDOM, Banasthali Vidyapeeth, Rajasthan, India

Email: shiva.german@yahoo.co.in
Mob: 07860939440
Abstract
Gold is considered the most feasible element of investment. In the times of crisis also, it has
proved to be most accessible and investors of all ages have taken it as the safest one to cope with
crisis. In India, Gold has been a pillar of tangible, storable and transportable wealth. It is the
core component of Indian culture-social and financial both. In commodity market, gold has its
unique relevance. But fluctuations in its prices make a weird situation in the market. This paper
deals with various aspects attached to gold like its relevance, reasons for price fluctuation and
impact on Indian economy in the times of global crisis.
Keywords: Commodity market, Inflation, Global crisis, ETFs
_________________________________________________________________________
Introduction
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It is to be rightly said that India is a commodity based economy since more than 70 % of the total
population is engaged in primary sector directly or indirectly. Major industries of the economy
like sugar, textile, metal, energy etc. are based on various commodities. So, far the financial
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returns are concerned, this sector has also become a good spot for booking good returns
comparatively besides hedging against the inflation, since the returns in precious metals
segments can be observed more than that of in equity and debt markets as are negatively
correlated. After gaining the considerable popularity, the major commodity exchanges in India
had started the future contracts in various commodities years back, which can serve preferably to
manage the risk that can arises due to adversity of expected prices of commodities besides the
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price discovery tool. The future contracts dealing in major commodity exchanges are standardize
in nature. In terms of technicality and chemistry, gold is definitely a chemical element, but in
India the value is much more than that. India is a country of diversity and different emotional
approaches.
Commodity Markets: Commodity trading is an age-old phenomenon, which involves the buying
and selling of primary products packaged as standardized contracts. It is very similar to the
trading of equity on a stock exchange; however, an investor buys and sells commodity products
instead of the shares of a company.
The current global economy is marked by uncertainty, and so, the biggest advantage of
commodity trading is that it acts as a hedge (risk control) against inflation, even in a modest
portfolio. In periods of high inflation, assets like bonds and stocks tend to suffer; however, the
value of commodities tends to rise. For this reason, it is advisable to invest a small part of your
portfolio in commodities think of it as your own hedge fund.
Commodity markets are harder to manipulate than equity markets, because prices are driven by
demand, supply, inventory and trading patterns.
A physical or virtual marketplace for buying, selling and trading raw or primary products is
basically a commodity market. For investors' purposes there are currently about 50 major
commodity markets worldwide that facilitate investment trade in nearly 100 primary
commodities.
Commodities are split into two types: hard and soft commodities. Hard commodities are
typically natural resources that must be mined or extracted (gold, rubber, oil, etc.), whereas soft
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commodities are agricultural products or livestock (corn, wheat, coffee, sugar, soybeans, pork,
etc.) There are numerous ways to invest in commodities. An investor can purchase stock in
corporations whose business relies on commodities prices, or purchase mutual funds, index funds
or exchange-traded funds (ETFs) that have a focus on commodities-related companies. The most
direct way of investing in commodities is by buying into a futures contract.
Applications of gold: The beauty of gold is that it is universal and is often used in political or
economic crises because gold is valuable throughout the world. Gold acts as a savior in the times
crisis and serves various purposes economically and politically. Gold can be kept as a gold bar
and used for investment purposes. Most central banks and other official bodies hold gold as part
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of their external resources. This is because gold is such a secure asset. It is an asset that can
actually be seen and touched and it is indestructible.
Importance of Gold in an economy:For thousands of years Gold has been a pillar of tangible,
storable and transportable wealth. Gold has always been a staple of global currency, a
commodity, an object of beauty and an investment. Gold is unique in that it does not carry a
credit risk. Gold is no ones liability. There is no risk that a coupon or a redemption payment will
not be made, as for a bond, or that a company will go out of business, as for an equity. And
unlike a currency, the value of gold cannot be affected by the economic policies of the issuing
country or undermined by inflation in that country. Gold is one of the most widely discussed
metals due to its prominent role in both the investment and consumer world. Even though gold is
no longer used as a primary form of currency in developednations, it continues to have a strong
impact on the value of those currencies. Moreover, there is a strong correlation between its value
and the strength of currencies trading on foreign exchanges. The value of a nations currency is
strongly tied to the value of its imports and exports. When a country imports more than it
exports, the value of its currency will decline. On the other hand, the value of its currency will
increase when a country is a net exporter. Thus, a country that exports gold or has access to gold
reserves will see an increase in the strength of its currency when gold prices increase, since this
increases the value of the countrys total exports gold. Thus, they will be particularly susceptible
to increases in the price of gold. Gold has a profound impact on the value of world currencies.
Even though the gold standard has been abandoned, gold as a commodity can act as a substitute
for fiat currencies and be used as an effective hedge against inflation. There is no doubt that gold
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will continue to play an integral role in the foreign exchange markets. Therefore, it is an
important metal to follow and analyze for its unique ability to represent the health of both local
and international economies.
Literature Review
Researchers have always found interest in this subject matter. Not just researchers, but corporate,
political troops, businesspeople, finance managers, etc, have targeted gold. A study undertaken
by A. Arun Kumar depicted that there is more fluctuation in India in gold prices than other
countries. According to an article published in The Economic Times,Indians love gold. More
than 18,000 tonnes of the metal is lying in Indian households. This is enough to supply
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Americans with all the gold they want for the next 100 years. Thats the theory. In reality, very
few Indians would want to sell the gold they own. Nearly 83% of the respondents in an online
survey conducted by economictimes.com said that despite the high prices, they were not
considering selling their gold holdings. In fact, 85% wanted to buy more gold this year, and 28%
of these were determined to do so irrespective of the price of the metal. A comparison of demand
and supply fundamentals for gold, both before and after 1971, suggests the surge in golds
purchasing power in the 1970s was at least in part a reaction to the prolonged period during
which gold had been held at a fixed price. Other factors including inflation and spikes in the
prices of most commodities also played a role in the rise of golds purchasing power. Post-
1971, the increased worldwide demand for gold pushed up the rate of exchange between gold
and other commodities and intermediate products.
The more recent increase in the supply of gold has, however, pushed golds purchasing power
back towards its historic mean(Stephen Harmston). According to Jerry White, a rising gold
price signifies trouble ahead. Its a kind of canary in a coal mine. As more individuals become
concerned that their dollars will buy less in the future and exchange them for hard assets,
commodity prices such as food and fuel and metals and building materials will continue to rise.
Foreign central banks that hold large quantities of depreciating dollar-denominated debt will
demand higher interest rates to compensate for their loss in value or will swap out of dollars to
buy gold, and the gold price will continue under upward pressure, while the value of the dollar
declines. This is a long-term vicious cycle. If it is allowed to continue, dollar holders will lose
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faith in the currency, eventually resulting in a situation where no one is willing to hold dollars at
all. This is hyperinflation.
According to an article in The Economic Times, Studies have proved that gold has a weak
correlation with equity, which makes it an ideal asset for diversification. Therefore, the presence
of gold in a portfolio makes it more stable and resilient to volatility or market fluctuation. Gold
ETFs provide an opportunity to investors to accumulate gold over a given period of time. Since it
can be purchased in small quantities, one can plan the procurement as per future requirements,
say, for the marriage of children, etc.
Moreover, there is no risk of theft and one need not worry about the storage cost (as in case of
physical gold) because such units are held in demat or paper form. In the case of physical gold,
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one ends up paying extra for making charges as well, but there is no extra charge applicable in
gold ETFs. When needed, one can exchange them in multiples of 1 kg units of 0.995 purity.Gold
and silver have been in bull markets since June of 2000 and the trend continues, as nations get
deeper in a financial hole, which is reflected in their currencies in the form of higher gold and
silver prices. Manipulation of paper gold markets cannot continue on forever. One derivative
default and the whole edifice could collapse. Manipulation only allows you to buy cheaper, but
once the cartel is out of gold and silver underlying their positions, the game will be over.
(Manipulation of the Paper Gold Market-The Value of Worthless Paper Gold versus
Physical Gold)A problem statement regarding mismatch between demand for and supply of gold
projected many aspects. In India, Hutti gold mine company in Karnataka is the only company
contributing 3 tonnes of gold to Indian market however another source of gold is from the
recycled jewellery or scrap jewellery. In 2006 105 tonnes of gold was recycled in a year. To
meet the bulk demand from the Indian market India imports approximately 700 tonnes of gold
per year. In the year 2008 during the diwali time the demand for gold increased leading to the
fall in the gold price from $900 to $712 this was because of the reduction in demand that
happened in the year 2007 when the gold price went up. The high price of gold has reduced the
demand for it especially in the jewellery sector. However in 2005 when the Gold price went up
the demand for gold also increased equally. The real estate and stock market was considered a
better option than investing in gold. This made the analysts comment that the demand curve for
gold in India is inverted. However the Indians believe that gold is the best way to preserve and
improve their wealth. During recession investors felt that gold was the best mean to secure and
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protect their wealth. But the demand for gold went down because of the raise in the price of
gold.Indians gold demand is met through imports.
Rabi N. Mishra and G. Jagan Mohan, 2012, in their study entitled Gold Prices and Financial
Stability in India proved that domestic and international gold prices are closely interlinked. The
paper also concludes that implications of correction in gold prices on the Indianfinancial markets
are likely to be muted. According to Mahmood Yahyazadehfar and AhmadBabaie (2012), the
relationship between nominal interest rate and gold price with stock price are negative. Also, the
results of Impulse-Response Functions shocks show that stock price reaction to the shocks is
very fast.
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In India, gold is one of the foundation assets for Indian households in the form of investment. It
is viewed as secure, liquid investment. Four factors have been considered here which influence
the gold prices and the analysis of these factors reveals that Gold price and Dollar value share an
inverse relationship i.e. an increase in gold price will result in decrease in the Dollar value. Also
Gold prices and Crude oil price share a positive correlation which can be understood from the
analysis. It can be inferred that an increase in the gold prices will increase the crude oil prices.
Gold prices and repo rates are interdependent and also negatively correlated during 64nalyzing-
08 to February-10 i.e. increase in repo rates resulted in decrease gold prices and. But the
correlation remained positive during the other two periods i.e. from November-06 to August-08
and March-10 to October-11. Gold prices and inflation rates are also dependent and positively
correlated i.e. increase in inflation increases gold prices also. It is concluded that all the select
factors like USD, crude oil prices, repo rate and inflation do have impact on the price of the
gold.(A study on impact of select factors on the price of Gold)As per a research study, a Gold
price persists to increase in India because they are considered gold the safe haven investment as a
financial asset as well as jewellery. World Gold Council report says that India stands today as the
worlds largest single market for gold consumption( The impact of domestic gold price on stock
price indices-An empirical study of Indian stock exchanges )
An article in The Hindu says that analyzing golds relationship with other financial market
variables, the authors conclude that prior to 2003, stock prices, global inflation levels and the
dollar were the biggest factors affecting international gold price movements.At that time, gold
proved a good long-term inflation hedge and usually moved in the opposite direction to the stock
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markets. But post-2003, these traditional relationships have been breaking down. In this period,
global inflation rates alone have influenced gold prices. For shorter periods, even inflation isnt a
factor; it is gyrations in the US dollar that are impacting gold prices more than any other
variable.According to a new report from Price Waterhouse Coopers and the World Gold
Council, the gold industry generated more than $210 billion for the global economy last year
roughly equivalent to the gross domestic product of Beijing. It is the first study to factor into
account the entire value chain, from large-scale mining supply to consumer demand. Due to
difficulty researching small mining operations, the report likely underestimates the total fiscal
contribution of the gold industry. It is the first study to factor into account the entire value chain,
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from large-scale mining supply to consumer demand. Due to difficulty researching small mining
operations, the report likely underestimates the total fiscal contribution of the gold industry.
According to Gnanasekar Thiagarajan, gold price futures in India, which hit their lowest level
in eight months, are likely to recover from the multi-months low, helped by bargain buying.The
actively traded gold for April delivery on the Multi Commodity Exchange was 0.11 percent
higher at 29,378 rupees per 10 grams, after hitting a low of 29,111 rupees last week, a level last
seen in mid-July. Most negative factors have been priced in. Gold is finding good physical
bargain hunting interest at lower levels.
Objectives
This research paper serves the following objectives:
1. To study the reasons for fluctuations in gold prices.
2. To analyze the pros and cons of various gold alternatives.
3. To study Gold ETF.
4. To study the impact of high gold prices on economy.
Research Methodology
The study is based on secondary data and specially literature review. The paper basically uses the
data available through journals, reports, articles,etc.
Findings, Analysis and Interpretation
Various Types of Investment Alternatives in gold and their pros and cons:The gold investment
is one of best wisely investments. There are too many fresh investors take part in the gold market
without any investigation, which almost lead to purchasing the inappropriate gold product.
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However, the inappropriate gold product could cost thousands of dollars in the long term. Thus,
choose a right gold product is really important for a investor. In that way, as a freshman the first
is to acquaint the types of gold investment products and their characteristic.
Bullion Bars
Gold bullion bars are the preferred form of investing for financial institutions, governments, and
anyone with a lot of money. The reason is that the amount of gold in gold bullion bars must be
above 99.5% in purity to qualify as investment grade and sizes are generally quite large (1 KG or
400 ounces are common) and therefore gold can be acquired with little to no premium over the
spot price.
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Bullion Coins
For smaller investors, bullion coins might be a more preferred gold investment method.
Premiums for coins differ from location to location but these days with some smart shopping and
online options, bullion coins can be gotten at small premiums. A distinct advantage is that an
investor can slowly accumulate possessions and spreads out the risk of any type of gold being
counterfeit, stolen, lost, or other risk to many individual parts. Investors in this area should be
cautious of what type of coin they are buying because different coins have different amounts of
gold purity which can drastically affect the price. The buy/sell spread for gold coins also can be
large and therefore cost you if you dont intend to hold the coins for a long time. Modern gold
coins like the British Sovereign serves as legal tender.
Gold Backed Securities
Gold backed securities are one of gold investment ways which indirectly invest gold. It combines
the benefits of physical gold bullion with the liquidity of the traditional securities market.
Usually, the gold of securities can be redeemed, but the redemption fee is relatively high to
prevent gold trading frequency. Gold exchange-traded funds (ETFs) are an investment fund
traded on stock exchanges, much like stocks. Different from the stock ETF, gold ETF is a
financial derivative product tracking the spot gold price.
Advantage of gold backed securities is: first, the dealing spreads are comparatively lower than
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physical gold (such as gold jewelry, coins and small bars), commonly they are 0.5%; second,
removed from the gold custodial fees, storage fees and insurance costs, only need pay a
management fee of about 0.4%; at last, with high liquidity, it is convenient to trade.
Disadvantages of gold backed securities: investor does not have gold ownership; some stock
exchanges impose extra charges on each trading.
Gold mining stocks
Gold mining stocks do not directly invest in gold but in gold mining companies. Compare with
other gold investments, it is more speculative. Gold mining stocks carry risks, thus, as the
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investors would like to invest gold mining stocks should think again. This investment way need
the investors have a broader risk tolerance, and can accept the possibility of gold-based losses in
exchange for the potential for triple-digit gains.
Gold mutual funds
Gold mutual funds are another way to invest in gold. Its suitable for those investors who would
like to invest in physical gold, but still desire some exposure to the precious metal. However, be
careful of high annual charges that may plus hidden charges, and analyze the offering prospectus
prudentially.
Gold options and futures
Gold options and futures are the gold investment derivatives which are short term speculation on
the future gold prices. The markets are more complex and trading in speculation but not in
physical gold. Thus, those ways of investments are suitable for more experienced and
sophisticated investors. To buy options is risky, more investors lose than win. The prominent
advantage is that the investor can control a large investment with a small, and limited, amount of
money. The disadvantage is that options expire within a fixed period of time. Gold options and
futures may bring a large fortune; it also may be lost all in an instant.
Gold ETFs
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An even easier way to get into gold investing is through ETFs (Exchange Traded Funds) or a
variant of it like ETCs (Exchange Traded Commodities), CEFs (Closed-end funds) or ETNs
(Exchange-traded Notes). These are not funds in the most traditional sense because they
usually dont have a collection of different securities but instead only exist in the purpose of
tracking the price of gold and they have managed to do that nearly flawlessly to this point (some
funds contain a more general mix of commodities or derivatives of gold but are less popular).
An analysis of Gold ETFs:Gold exchange-traded products are exchange-traded

funds (ETFs), closed-end funds (CEFs) and exchange-traded notes (ETNs) that aim to track the
price of gold. Gold exchange-traded products are traded on the major stock
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exchanges including Zurich, Mumbai, London, Paris and New York. The first gold exchange-
traded product was Central Fund of Canada, a closed-end fund founded in 1961. It later amended
its articles of incorporation in 1983 to provide investors with an exchange-tradable product for
ownership of gold and silver bullion. It has been listed on the Toronto Stock Exchange since
1966 and the AMEX since 1986.[2]
The idea of a gold exchange-traded fund was first conceptualized by Benchmark Asset
Management Company Private Ltd in India when they filed a proposal with the SEBI in May
2002. However it did not receive regulatory approval at first and was only launched later in
March 2007.[3] The first gold ETF actually launched was Gold Bullion Securities, which listed 28
March 2003 on theAustralian Securities Exchange. Graham Tuckwell, the founder and major
shareholder of ETF Securities, was behind the launch of this fund and enlisted N.M. Rothschild
& Sons (Australia) Ltd, Citibank and Deutsche Bank as market makers on the ASX. Gold ETFs
are exchange traded funds that are meant to track closely the price of physical gold. So gold ETF
lets you own gold in your demat account. Each unit of the ETF lets the investor own 1gm of gold
without physically owning it. Thus investing in a gold ETF provides the benefit of liquidity and
marketability which are a limitation of owning physical gold. Gold ETF is liquid because you
can trade in it at any time during market hours. Gold ETF is marketable because you can trade
any amount in it just like a normal stock including short selling and buying on margin. Owning
gold ETF also is cheaper than owning physical gold because it has no cost of carry (the cost of
storing physical gold).
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Gold price history chart including last 1 year, 5 years and 10 years history. Here one can
see last 50 years of gold price history in India.In 1950, the price of gold was around Rs 100
per 10 gm of gold. Now it reaches to value of Rs 32000 per 10 gm of gold. Gold prices touched
a record high in 2012.

1950 to 1959 Gold Price Chart in India 1960 to 1969 Gold Price Chart in India
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Fig 1 Fig 2
1970 to 1979 Gold Price Chart in India 1980 to 1989 Gold Price Chart in India
Fig 3 Fig 4
1990 to 1999 Gold Price Chart in India2000 to 2012 Gold Price Chart in India
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Fig 5 Fig 6
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Source:http://career-job-openings-in-india.blogspot.in/2012/10/yearly-gold-price-chart-in-
india-last.html
The data below shows trend in the Price History of Gold (10gms) over the given period of time.
Given below is year wise Price of Gold in India in last 42 year. In the initial period, the price of
gold was around Rs 193.00 per 10 gm of gold. Now it reaches to value of Rs 31799 per 10 gm of
gold. Its a huge rise in price of gold.
Gold ( 10 Gms )Price History
Year Price Year Price Year Price

1971 193.00 1991 3466.00 2011 26400.00
1972 202.00 1992 4334.00 2012 31799.00
1973 278.50 1993 4140.00
1974 506.00 1994 4598.00
1975 540.00 1995 4680.00
1976 432.00 1996 5160.00
1977 486.00 1997 4725.00
1978 685.00 1998 4045.00
1979 937.00 1999 4234.00
1980 1330.00 2000 4400.00
1981 1800.00 2001 4300.00
1982 1645.00 2002 4990.00
1983 1800.00 2003 5600.00
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1984 1970.00 2004 5850.00

1985 2130.00 2005 7000.00
1986 2140.00 2006 8400.00
1987 2570.00 2007 10800.00
1988 3130.00 2008 12500.00

1989 3140.00 2009 14500.00

1990 3200.00 2010 18500.00
Source:http://portal.indiainfoline.com/datamonitor/Others/Commodity-Research/Gold-
performance/The-Gold-10gms-Price-History-year-wise.aspx
Fig 7
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Gold prices keep changing as the precious metal is used in hedging against inflation. This is
based on the theory that paper money may lose value leaving gold with the real purchasing
power. Looking at the gold price history gives us an insight to price movements over time and
comparing that to what economic factors were in force at those times can give us a small peak
into possible future.
Tables showing percentage change in Gold Prices since 1971
Fig 8
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Fig 9
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Fig 10
Fig 11
Fig 12
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Fig 13
Fig 14
Fig 15
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Fig 16
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The above charts show that the prices have shown continuous change at different time intervals.
A critical shortfall in gold has rocked the market again and again.1976 marks first negative
percentage change in gold prices in that 5 year era. Since 2007, there has been continuous
increase in prices. Every year has seen some or the other changes. Price rise in 1992 proves that
LPG reforms literally affected Indian economy and took it on a global platform where Gold
performed at an international level. Global recession left other stocks shocking, resulting in huge
demand for gold as the most feasible investment option.
Relation of Gold with Global crisis: Leading up to the crisis there were many telltale signs that
should have set off alarm bells. The vast majority of academics, officials and investors ignored
the signals and rather made profuse claims about a new era. There was a general euphoria about
the conditions in the global economy and with many commentators claiming that this time is
different. As argued by this study, there are, however, many similarities between the US sub-
prime crisis and previous banking crises such as the massive surge in housing and equity prices,
the growing current account deficit and rising level of (private) debt. At the same time, the
exposure of lenders and investors was complicated by the unprecedented level of securitization
of mortgages (through collateral debt obligations), which created considerable uncertainty in
financial markets as the crisis unfolded. This, in turn, resulted in a sudden reversal of risk
perceptions (from risk seeking to risk aversion).
Since 2007 the world has seen a period of striking economic and financial volatility, featuring
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the deepest recession since the 1930s and steep declines in the value of many financial assets
both traditional ones such as equities and newly developed ones such as mortgage-backed
securities. Against this background, however, gold has performed strongly with its price roughly
doubling since the global financial crisis began in mid-2007. Golds performance in this period
has sparked something of a reappraisal of its characteristics as an asset and led some to revisit its
proper place in investors portfolios. As a store of value which is relatively immune to inflation,
financial crises and credit default, gold has been used for centuries to protect individuals wealth.
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These special properties are borne out in the recent performance of gold, and investors may
continue to value them given the significant uncertainties still facing the global economy.
Reasons for fluctuation in Gold Prices: The price of god is influenced by numerous factors, key
among them being the production cost because gold producers always intend to maintain
profitability. Most of the gold traders and investors value gold stocks based on existing market
values as well as future gold prices. They buy or sell gold stocks based on speculation on the
gold price movement leading to constant fluctuations. Some contributing factors to the change in
gold prices include supply and demand, where there is not enough gold being produced to meet
demand. With a rise in demand comes a rise in price. Another factor is inflation, where people
find safety in gold when currency rates are low.Other than this, the following factors are also
responsible for gold price fluctuations.
1. Currency Strength Or Weakness- The strength or weakness of the US dollar will also
cause price fluctuations for gold. When the currency is weak, sales and investments are
strong. When the US dollar is strong, many investors will turn to stocks and other
investment choices, causing the gold price to decrease some.
2. Demand and Supply- Supply and demand is often cited as the most common reason
for price fluctuations. According to a number of financial experts the demand for gold is
exceeding the available supply. As more countries emerge into industrialized nations this
pressure and increased demand may cause the price to fluctuate even further. There is a
limit to the amount that can be produced each year and the demand for the available
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metal continues to rise even though production numbers are staying stable.
3. Investor Fears And Concerns- One of the biggest factors that can cause costs to
fluctuate is emotions. The fears and concerns that investors have will show in the demand
for precious metals. When investors face future uncertainty or they are not sure which
direction the USA is headed in then gold will see an increase in demand and a higher
price as a result of this. Emotions should not play a role in investment decisions but they
often do.
4. Manipulation- Market and price manipulation are another reason that prices are so
volatile and seem to change hundreds of times in a single day. Some traders will buy and
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sell gold on a short term basis, taking advantage of small price spikes throughout the day.
This activity will cause costs to go up and down as the market adjusts to the trades being
made.
5. Current Global Events- Any current global events that affect the supply, demand, or
attraction of gold can result in a price that fluctuates frequently. If miners go on strike, a
mine collapses, or there are other disruptions in the supply to the market then the price of
the metal will usually increase. If a number of new sources are found and mined then this
may decrease the market price.
6. The Economy- Economic factors play an important role in setting prices. A struggling
economy means a strong demand for gold, while a thriving economy will see much lower
costs. As long as there are economic problems then investors will continue to use gold to
hedge against the future and this increases the market price that gold demands.
The most popular reason to own gold is as a hedge against inflation. The theory is as
paper currency loses value, gold will retain its purchasing power, making it a safe place
to preserve one's wealth. The supply and demand factor is pivotal in determining the
price of gold. Many analysts argue there isn't enough gold being produced to satisfy
rising demand. The above-ground stock of gold is around 160,000 metric tons and grows
about 2,400 tons a year, which is only 1.75%, while demand keeps expanding. In the
World Gold Council's recent Gold Demand Trend report, gold mine supply rose 3% in
the third quarter from a year ago compared to a 12% rise in total global identifiable gold
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demand. Mine production grew to 702 tons while demand popped to 921.8 tons.
Impact of fluctuations in gold prices on Indian economy:The price of gold increases and notice
many drastic changes which effects on the whole economy. The impact of the rise in
international gold prices is reflected in its domestic prices as well. Despite the sharp recent price
rise, in India, demand for gold has sustained, not only as a component of safe savings but also
due to its social and cultural importance.Indians may be the biggest buyers of gold in the world
with the country also holding the prime position as the largest importer of the precious metal.
But when India purchased 200 tonnes of gold under the International Monetary Fund's limited
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gold sales programme, it was interpreted by experts that it may further inflate the gold price
when the price was already ruling high. A new study in India has attempted to throw more light
on this.The report has indicated that there has been an almost unabated rise in the international
gold prices in recent months. As gold is an integral part of savings of a large number of savers,
the report has noted that it has raised apprehensions whether any correction in gold prices would
have a destabilizing effect on the financial markets. Fluctuations of the gold price have a
significant impact in world financial markets, especially the dollar. Gold sometimes takes the
role of leader in the currency markets, and sometimes it has the role of the follower, but
generally the dollar specifies the direction of gold prices, because gold is valued in dollars in the
global market. Economic and financial experts believe that due to the severe fluctuations in the
value of the dollar during the past months, gold is considered the best tool for international
investors. World gold prices are usually determined on the basis of real interest rates in the
world, the value of the dollar and the amount of reserves held by central banks; thus any change
in these factors will have significant impact on the price of gold. In recent months, due to
increasing international concern over government debt and the continued decline of the dollar,
global demand for buying gold has increased drastically. While the growth of gold demand in
India and China has in recent years had a significant impact on gold price developments, now the
entire worlds central banks are turning to the gold market, which is a major factor behind the
increased gold price.The fall in gold prices could not have come at a better time for India. Lower
crude oil and gold prices will help bring down the current account deficit (CAD) - excess of
imports over exports plus remittances - which will improve the country's investment rating. A
77
wide CAD is a sign of economic weakness as it means the country is a large debtor.
Conclusion
Investing in gold is potentially a way to maintain purchasing power. The purchasing power of
gold rises and falls as the real price of gold rises and falls. Investing in gold entails a bet as to the
future real price of gold, whether or not an investor even thinks about the bet. It is a fact that the
real price of gold is very high compared to historical standards. Indians love gold. More than
18,000 tonnes of the metal is lying in Indian households. As we know that Indias domestic
production of gold is very limited, the rising demand has to be sourced from outside the country.
APJEM
Moreover, Gold as a commodity on its own does not add much to the productive capacity of the
economy. When one buys gold, it either is stored in lockers or gets converted into jewellery. In
both the cases, money spent on purchasing gold gets blocked since gold is not a productive asset.
There are many factors contributing to the change of gold price. Among all the factors, inflation
rate and US dollar draw the most attention. Gold prices keep changing as the precious metal is
used in hedging against inflation. This is based on the theory that paper money may lose value
leaving gold with the real purchasing power. Gold has acted as a safe haven for investors,
especially at the wake of the global financial crisis that hit markets all over the world. This has
led to an emerging trend where traders and investors set aside substantial amounts of their funds
into the gold portfolio. This is a key factor in the fluctuation of gold prices. In addition, like-
minded investors have joined the bandwagon such that there is peer pressure in buying gold,
leading to frequent gold price fluctuations.
References
BS Reporter11 reasons why gold prices can rise-Nomura believes the worst is behind us
as far as gold prices are concerned, Business Standard, June 26, Mumbai
Claude B. Erb, Campbell R. Harvey, The Golden Dilemma, NBER Working Paper
Series,18706, National Bureau Of Economic Research, January 2013
Commodity Prices:Is Gold Just Another Commodity?, IMF Working Paper, July 2009
Gold Report 2012-In Gold we trust, Erste Group Research, July 2012
Harmston Stephen, Gold as a store of Value, World Gold Council, Research Study No.
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Indias Gold Rush: Its Impact and Sustainability, ASSOCHAM India
Kumar A. Arun, Revolution of gold in Indian Economy, International Journal of
Research in Management, Issue-2 Vol-5, September 2012

Mishra RN, Mohan GJ (2012). Gold Prices and Financial Stability in India, RBI working
paper series, Department Of Economic And Policy Research. 2:1-16.
RBI Report (2012),Working Group to Study the Issues Related to Gold Imports and Gold
Loans by NBFCs in India, Pp. 1-224
Shaun K. Roache, Marco Rossi, The Effects of Economic News on
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Thai-Ha Le, Youngho Chang, OIL AND GOLD: CORRELATION OR CAUSATION?,

Division of Economics, Nanyang Technological University, Singapore 639798,
Singapore
The Importance of Gold in a Portfolio for the Individual Investor,Blanchard
Yahyazadehfar M , Babaie A (2012). Macroeconomic Variables and Stock Price: New
Evidence from Iran, Middle-East J. Scientific Res. 11 (4):408-415.
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Arth Prabandh: A Journal of Economics and Management

An Analysis of Gold Price Variation and Its Impact on Commodity Market in

1.Dr. Bimal Jaiswal

2. Ms. Shiva Manoj

Research Scholar, WISDOM, Banasthali Vidyapeeth, Rajasthan, India

Keywords: Commodity market, Inflation, Global crisis, ETFs

direct way of investing in commodities is by buying into a futures contract.

Gold Backed Securities

exchanges impose extra charges on each trading.

Gold mining stocks

Gold mutual funds

Gold options and futures

An analysis of Gold ETFs:Gold exchange-traded products are exchange-traded

a record high in 2012.

Gold ( 10 Gms )Price History

Year Price Year Price Year Price

1984 1970.00 2004 5850.00

1988 3130.00 2008 12500.00

1989 3140.00 2009 14500.00

Tables showing percentage change in Gold Prices since 1971

Research in Management, Issue-2 Vol-5, September 2012

Thai-Ha Le, Youngho Chang, OIL AND GOLD: CORRELATION OR CAUSATION?,

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