gold as a macroeconomic variable in indian context

8/13/2019 Gold as a Macroeconomic Variable in Indian Context

1/32

Gold as a macroeconomic variable in Indian context

Gold as a macroeconomic

variable in Indian context


2/32


Contents

1. Abstract ........................................................................................................................................... 4

2. Introduction .................................................................................................................................... 5

3. Why Gold? ....................................................................................................................................... 6

Supply of Gold ......................................................................................................................................... 6

Mine production ............................................................................................................................. 6

Recycled Gold .................................................................................................................................. 7

Production process of Gold ..................................................................................................................... 7

Uses of the Gold ...................................................................................................................................... 7

Jewellery ......................................................................................................................................... 7

Finances and Investing .................................................................................................................... 8

Electronics and Computers ............................................................................................................. 9

Dentistry and Medicine ................................................................................................................. 10

Aerospace ..................................................................................................................................... 10

Medals and Awards ....................................................................................................................... 10

Demand of Gold .................................................................................................................................... 11

4. Gold in India .................................................................................................................................. 12

Factors affecting Demand of Gold in India ........................................................................................... 12

Drop in world gold prices .............................................................................................................. 12

Depreciation of the Rupee ............................................................................................................ 13

Syrian invasion .............................................................................................................................. 14

Central banks buying gold ............................................................................................................. 14

Traditional demand for gold in India ............................................................................................ 14

Increase in smuggling .................................................................................................................... 14

Indias Gold import............................................................................................................................... 15

Recent trends in gold imports in India .................................................................................................. 15

5. Gold Price ...................................................................................................................................... 17

Gold price variation with GDP in India .................................................................................................. 17

Gold price variations with Current Account Deficit in India ................................................................. 18

Gold price variations compared with Oil price variations .................................................................... 21

Comparison of gold prices in USD and INR ........................................................................................... 23

6. Policy instruments regulating gold prices/demand ...................................................................... 25

Earlier attempts at controlling gold importThe Gold control Act ..................................................... 25


3/32


Current attempts at controlling gold import ........................................................................................ 25

Measure taken by domestic organizations trading in gold ........................................................... 25

Appealing to the Good Samaritan................................................................................................. 26

Indian Government considering buying back gold ....................................................................... 26

Timeline of key events in 2013 to control gold imports ....................................................................... 26

7. Expected impact on the economy ................................................................................................ 28

8. Future Uses of Gold ...................................................................................................................... 29

Substitutes for Gold and Reductions in Use ......................................................................................... 29

9. Conclusion and Recommendations............................................................................................... 30

10. References ................................................................................................................................ 32


4/32


1.AbstractHistorically gold has been used as an alternative to saving wealth, for jewellery and in the form of

gold reserves by Central Banks. In India, the demand for gold is primarily for household consumption

driven by the former two factors. In last few years, the demand for gold has risen in other areas like

electronics, dentistry, aero-space as well. This demand is so strong that India is the biggest consumer

of gold in the world.

Overall, the supply of gold is very limited and remains stable and involves a complex production

process. In India, most of the gold is imported and hence, this has significant impact on the foreign

trade of the country, specifically the current account deficit. Though the government of India is

taking steps to curb the imports of this precious metal, the macro economic factors are going against

it. The amount of gold imported to India is rising each year. Drop in world gold prices, depreciation

of rupee, central banks buying gold and the use of gold in Indian traditions are few of the factors

that influence the demand of gold.

We then explore the relationships between gold price variation and other macroeconomic indicators

like GDP of India (both have risen in last 3 decades), current account deficit (both have increased at a

steady pace in last few decades), oil price (oil price has been more volatile than gold price though

there is no co-relation between them in the past 1.5 years).

We then discuss the various steps taken by the government to curb gold imports. Few of these are in

line with the aim. For example, Central banks buying gold, Indian Government considering buying

back gold, depreciation in price of gold etc. But few factors like drop in global gold prices, traditional

demand for gold in India etc. work against the government's aim.


5/32


2. IntroductionRupee depreciates by more than 20% in past 3 months

S&P has a "BBB-minus" rating on India with a "negative" outlook. A downgrade would push Asia's

third largest economy to "junk" status. Economic Times

International Monetary Fund (IMF) brought down India's growth rate projections to 5.6 per cent for

this fiscal and 6.3 per cent for the next financial year. Hindustan Times

These are few of the news headlines which highlight grim state of current Indian Macroeconomic

environment. The Indian economy has been slowing down since the past many years. We survived

the 2008 recession with minimal effect. However, since then we could never really resurrect the high

growth rates that the country witnessed in the first half decade of this millennium. The growth kept

slowing since 2008 and in the recent few months has decelerated even more. The various measurestaken by the Government to control the decline have not been very successful.

One of the recent crises faced by the Government of India is the shrinking forex reserves and the

increasing fiscal deficit. Gold is the second most imported commodity after oil and hence its

contribution to the trade deficit, especially the current account deficit is significant. Since gold is

considered a non-essential commodity, the Government and the RBI has taken several measures to

control its import.

In this report, we intend to analyze the role gold plays in the macroeconomic environment of a

country. We also make an attempt to understand how the series of measures taken by theGovernment to curb gold imports are going to affect the demand and prices of gold and how this in

turn can affect the current economic scenario.


6/32


3.Why Gold?Gold is the most useful metal when compared to all other metals mined from the Earth. Its

uniqueness is derived from a diversity of special properties. It conducts electricity, does not tarnishand is very easy to work with. It can be drawn into wire, alloys with many other metals, can be

hammered into thin sheets, can be melted and cast into new shapes. Not to mention, gold is

unrivaled in its natural brilliant luster and glossy shine. Gold is a memorable metal that occupies a

special place in the human mind.

Supply of Gold

Gold supply comes mainly from Mine production and recycled gold.

Figure 1: Distribution of gold supply. Source of data:http://www.gold.org/investment

Mine production

Gold is produced from mines on every continent in the world except Antarctica, where mining is

prohibited. There are a number of gold mines operating worldwide ranging in scale from minor to

enormous. Above figure does not include mining at the very small-scale.

At present, the overall level of global mine production is relatively stable. Supply from mineproduction is approximately 2,690 tonnes per year for the 5 five years.

The production of gold is rather stable because when new mines are developed, they mostly serve

to replace current production, rather than expanding global production levels.

Gold production experiences longer lead times. The approximate lead time for gold production at

new mines is 10 years. So, mining output is relatively inelastic as it is unable to respond quickly to a

change in price outlook. Even a sustained price, as experienced over the last few years, doesnt

translate easily into increased production.
http://www.gold.org/investmenthttp://www.gold.org/investmenthttp://www.gold.org/investmenthttp://www.gold.org/investment


7/32


Recycled Gold

As gold mine production is relatively inelastic, the recycling of gold ensures that there is a potential

source of readily available supply when required. This helps to balance for an increase in demand

and keeps the gold price stable. The high value of gold makes recovery economically viable, as long

as the precious metal is in a form that is capable of being extracted, melted down, re-refined and

reused. In the period of 2008-2012, recycled gold contributed an average 39% to annual supply

flows.

Production process of Gold

Production of gold involves six main phases:

Find the ore body Create access to the ore body Remove the ore by mining or breaking the ore body Transport the mined material from the mining face to the plants for treatment Processing Refining

This basic process applies to both surface and underground operations. The world's principal gold

refineries are based near major mining centers or precious metals processing centers worldwide.

Once refined, the bullion bars (having purity of 99.5% or higher) are sold to bullion dealers. These

dealers then trade with other jewellery or electronics manufacturers or investors. This dealer-based

bullion market lies at the heart of the supply-demand cycle. It facilitates free flow of the precious

metal, and underpins the free market for gold[15]

.

Uses of the Gold

Jewellery

Jewellery has been the largest component of annual gold demand. In the

12 months to December 2012, sales for jewellery amounted to around

US$101.8 billion. India is the largest consumer in volume terms,

accounting for 28% of demand in 2012. The last five years (till-2012) saw

an increase in value terms of around 430%. In 2012 alone, investment

attracted net inflows of approximately US$81.8bn.

The 2007-2009 financial crises has resulted in a decline in the volume of gold jewellery sales,

particularly in western markets, with the United States being hardest hit. However, jewellery

demand in India and Asia has since been recovering while in China growth in jewellery consumption

has been continuous.

Combination of affordability and desirability are the major drivers of demand by consumers.

Demand usually rises during periods of gradually rising prices or price stability, and then declines in

periods of price volatility. Several countries, including China and India, offer a considerable and clear

potential for future growth.


8/32


Why it is gold the perfect metal for jewellery?

Gold has been used for jewellery for a lot of reasons. Few of the reasons are: Its softness which

makes it easy to alloy with base metals in jewellery. Second, its shiny color and ability to alter its

hardness and ductility. Also it does not fade away; this property makes it a valuable element in long

lasting jewellery.

Next, Gold is preferred as it does not react with atmospheric moisture and rust. It has a stable

market value that is almost always rising. It is also very malleable and has the ability to be shaped

into many ornate patterns. Most importantly, it's cost per weight is high, making the jewelry

expensive, and thus lucrative to the jeweler.

It is a precious metal that is highly-valued by most people over the world, even since prehistoric

times! Its ability to reflect light and bright yellow color makes it very attractive. It also does not rust

or corrode and is very easy to clean. Therefore gold is considered the best metal for jewellery.

Pure gold is too soft to stand up to the stresses applied to many jewelry items. Craftsmen believe

that alloying gold with other metals such ascopper,silver,and platinum increases its durability.

Since then most of the gold used to make jewelry is an alloy of gold with one or more other metals.

The alloys of gold have a lower value per unit of weight when compared to pure gold. Karatage is the

standard of trade which was developed to designate the gold content of these alloys. Pure gold is

known as 24 karat gold and is is commonly known as "24K". An alloy that is 50% gold by weight is

known as 12 karat gold, commonly known as "12K". An alloy that contains 75% gold by weight is 18

karat (18/24 = 75%) and known as "18K". High karat jewelry is known to be softer and more resistant

against tarnish while low karat jewelry is stronger and less resistant against tarnish - especially when

in contact with perspiration.

Finances and Investing

There has been a strong growth in demand of gold in

investment and financing area. The last five years, 2007-

2012, saw an increase in value terms of around 435%. In

2012 alone, investment saw net inflows of approximately

US$82.3bn. The gold used as a financial backing for

currency is most often held in the form of gold bars (also

known as "gold bullion") or gold coins or Gold certificates.The use of gold bars keeps manufacturing costs to a minimum and allows convenient handling and

storage. Today many individuals, institutions and governments hold investments of gold in the form

of bullion. The key driver for this demand is due to gold's ability to insure against instability and

protect against risk. Of all the precious metals, gold is the most popularly used as an investment.

Investors generally buy gold as a hedge or harbor against economic, political, or social crises. Gold

market is also subject to speculation as are other markets, especially through the use of derivatives.

Also, gold price shows a long term correlation with the price of crude oil. This suggests one of the

reasons why gold is sold off during economic weakness.
http://geology.com/usgs/uses-of-copper/http://geology.com/articles/uses-of-silver/http://geology.com/articles/uses-of-silver/http://geology.com/usgs/uses-of-copper/


9/32


Electronics and Computers

The use of gold in various electronic, industrial, medical and dental

applications accounts for around 11% of gold demand, an annual

average of around 440 tonnes from 2008-2012.

Gold is a highly efficient conductor and has the ability to carry tiny

electrical charges. Because of this property a small amount is found in

almost all electronic devices like cell phones, televisions, GPS units and

more. Since gold is such an efficient conductor of electrical charges, it is also often found in

electronic instruments like desktop and laptop computers to transfer information quickly.

Almost all high tech appliances, ranging from computers to mobiles, have some gold content. In

addition, the property that electromagnetic radiation is reflected by gold has made it a popular

choice in protecting the expensive equipments or personnel that may be exposed to infrared light orother high level electromagnetic radiation sources.

Electronics

Solid state electronic devices use very low currents and voltages which are easily interrupted by

tarnishing or corrosion at the contact points. Gold is a highly efficient conductor that can carry these

tiny currents and still remain free of corrosion. Electronic components made with gold are hence,

highly reliable. Gold is used in connectors, switches and relay contacts, connecting wires, soldered

joints and connection strips.

A small amount of gold is used in almost every sophisticated electronic device. This includes- cellphones, calculators, PDAs, GPS units and other small electronic devices. Most large electronic

appliances such as television sets also contain gold.

Though gold is used in small quantity in these instruments but eventually when these devices are

used in large number; it leads to loss of this precious metal from society. Nearly one billion cell

phones are produced each year and these contain about fifty cents worth of gold approximately.

Their average lifetime is under two years and very few are currently recycled.

Computers

Accurate and rapid transmission of digital information through the computer and from onecomponent to another requires reliable and efficient conductor. Gold meets these requirements

better than any other metal and hence, this is most suitable for such equipments. The importance of

high quality and reliable performance justifies its high cost.

Edge connectors used to mount microprocessor, the memory chips in the motherboard and the

plug-and-socket connectors used to attach cables all contain gold. The gold used in these

components is generally electroplated over other metals and alloyed with small amounts of nickel or

cobalt to increase their durability.


10/32


Dentistry and Medicine

As gold is chemically inert, easy to insert and non-allergenic this metal is

best suited to make fillings, crowns, bridges and orthodontic appliances.

Gold has been used in dentistry since years (700 B.C.) and will probably

continue to be the best option for replacing missing or broken teeth. In the

medical field, small amounts of gold isotopes are also used in certain

radiation treatments and diagnosis.

Aerospace

Gold also plays an essential role in the aerospace industry where

reliable and effective technologies are key to survival. This metal is

used to conduct electricity, lubricate mechanical parts and to coat

the insides of space vehicles to protect people inside from infrared

radiation and heat.

In aerospace industry, where billions of dollars are spent on a

vehicle which once launched will have zero possibility of lubrication, maintenance and repair then

building it with extremely reliable materials is essential. This is the reason why gold is used in

hundreds of ways in every space vehicle that NASA launches.

Gold is also used in circuitry because it is a dependable connector and conductor. In addition, many

parts of every space vehicle are fitted with gold-coated polyester film. This film reflects infrared

radiation and helps stabilize the temperature of the spacecraft. Without this coating, dark colored

parts of the spacecraft would absorb significant amounts of heat. Gold is also used as a lubricant

between different mechanical parts.

Medals and Awards

As a highly esteemed precious metal, gold is widely used in

awards, crowns and religious statues. Because of its unparalleled

qualities, gold is one of the highest status symbols. Everything

from Academy Awards to Olympic medals, gold is used due to its

admirable qualities and it holds a superior place of value. Gold is

associated with many other positive qualities as well. Purity is

another quality associated with gold. This is one the reasons why

gold turns out to be the best choice for religious objects. For this

reason, crosses, communion ware and other religious symbols are almost always made with gold.


11/32


Demand of Gold

Demand for gold is widely dispersed around the world. East Asia, the Indian sub-continent and the

Middle East account for approximately 66% of consumer demand in 2012. India, Greater China

(China, Hong Kong and Taiwan), US and Turkey represented well over half of consumer demand. A

different set of cultural and socio-economic incentives drives each market, creating a diverse range

of factors influencing demand. Rapid changes in many of the key consuming nations are also likely to

produce new patterns of demand in the near future [15].

Figure 2: Distribution of gold demand. Source of data:http://www.gold.org/investment
http://www.gold.org/investmenthttp://www.gold.org/investmenthttp://www.gold.org/investmenthttp://www.gold.org/investment


12/32


4.Gold in IndiaIndia's love affair with gold is timeless, spanning centuries and millennia.

Different parts of India were rules by different dynasties. They followed varying monetary systems,

but gold acted as a common medium of exchange. Gold is a form of wealth that can be preserved

across wars and dynasties and natural calamities and disasters. It has been the only medium of

preserving wealth, especially in the rural India, land being the other main asset of economic value.

The mindset and traditions thus developed have continued till today. India is estimated to hold more

than 31,000 tonnes of gold commercially available [12]. At the current rate of`30317.40, this is

valued at almost`94,00,000 crores!

India also holds 557.7 tonnes of gold as reserves. This constitutes about 7% of the countrys total

forex reserves.

As a result of the gold buying mindset, Indians continue to buy gold. The domestic production of

gold is small which leads to import of gold in large quantities. India is the largest consumer and the

largest importer of gold[2]

. This has implications on the countrys external trade, as an increased gold

import adds to the current account deficit.

Factors affecting Demand of Gold in India

In spite of the Government of India taking numerous steps to curb gold imports, global macroeconomic factors are going against these measures. This section discusses some of these factors.

Drop in world gold prices

As can be seen from the chart below, the price of gold has dropped since the last one and a half

years. Gold now costs almost 78% of what it cost in Jan-12. This significant drop in the gold price has

increased the demand worldwide. Thus, this is acting against the policies that are trying to reduce

gold consumption.


13/32


Figure 3: Price of Gold in US $ since Jan-12. Source of data: http://www.goldprice.org

Depreciation of the Rupee

Now lets look at the same chart above after adding the price of gold in Indian Rupees. It can be seen

that due to the depreciation of the rupee, especially the accelerated depreciation in the last few

months, the price of gold in Indian rupees has only slightly decreased. Thus the depreciation of the

rupee has to a great extent reduced the impact of the fall in global gold prices.

Figure 4: Price of Gold in US $ since Jan-12. Source of data: http://www.goldprice.org

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

1,800

Pricein$

Value of Gold in $ and per troy ounce

Price in US $

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

1,800

Jan-1

2

Feb-1

2

Mar-12

Apr-12

May-1

2

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-12

Nov-1

2

Dec-1

2

Jan-1

3

Feb-1

3

Mar-13

Apr-13

May-1

3

Jun-1

3

Jul-13

rcn

Pricein$

Value of Gold in $ and per troy ounce

Price in US $ Price in


14/32


Syrian invasion

If the west attacks Syria, it is feared that this will lead to increase in oil and gold prices. The increase

in gold prices will certainly help in curtailing its demand to some extent. However, the increase in oil

prices will more than compensate for any positive effect that the drop in gold demand would have

had on the economy. This will effectively put the economy in a bigger distress.

Speculations are also going around that US may delay tapering of its bond buying program if the

attack on Syria materializes.

Central banks buying gold

Central banks of countries have continued adding to their gold reserves. Turkey was at the top of the

list by buying 22.5 tonnes of gold in July. Russia too has increased its gold reserves. This is

contributing to the demand of gold and thus increasing the price of the precious metal.

Traditional demand for gold in India

The demand for gold peaks in India during the festival of Diwali, especially on the day of dhan teras

which is considered an auspicious day for buying gold. Similarly, gold demand peaks on the day of

Akshay Tritiya, though this is considered to be more a clever demand management technique.

Weddings by far contribute the maximum to the gold demand. It is estimated that up to 75% of the

gold demand in India is for weddings [2].

Whether it is for safe investment or as a status symbol, this results in a humungous demand for gold.

Increase in smuggling

With the restrictions in place for importing gold in India, importing gold has become expensive.

However, the demand for gold continues to exist. After India imposed these curbs, it was found that

the demand for gold in the neighboring countries dramatically increased. Within a few months, gold

import in Nepal went up 14% and that in Sri Lanka went up by 46% while the import in Pakistan went

up by a whopping 386% [8].

This has prompted these countries to take counter measures which has imposed various duties and

taxes on gold imports.

However, it is feared that a considerable amount of smuggled gold has already found its way into the

country, even though about 300kg of gold was seized at Dhaka airport from a consignment.


15/32


Indias Gold import

Here we take a look at what are the major exporters of Gold to India.

Switzerland is by far the biggest exporter of gold followed by UAE which exports about a third by

volume of Switzerland.

South Africa, Australia and USA are the other three major exporters but when compared with

Switzerland they are quite small. Switzerland exports more gold than the other 4 combined, and the

countries after that are even smaller

Figure 5:Gold imports in India. Source:http://www.onemint.com/2012/01/26/which-countries-does-

india-import-its-gold-from/

Recent trends in gold imports in India

Barring a drop in 2008, gold imports in India have been rising. The chart below shows the actual

levels of imports from 2006 to first half of 2013 and the predicted imports for 2013. In the first 6

months of 2013, Indian import of gold had risen to 516 tonnes.

Chart Title

SWITZERLAND UAE SOUTH AFRICA AUSTRALIA U S A

HONG KONG U K GERMANY CHINA NETHERLAND
http://www.onemint.com/2012/01/26/which-countries-does-india-import-its-gold-from/http://www.onemint.com/2012/01/26/which-countries-does-india-import-its-gold-from/http://www.onemint.com/2012/01/26/which-countries-does-india-import-its-gold-from/http://www.onemint.com/2012/01/26/which-countries-does-india-import-its-gold-from/http://www.onemint.com/2012/01/26/which-countries-does-india-import-its-gold-from/http://www.onemint.com/2012/01/26/which-countries-does-india-import-its-gold-from/


16/32


Figure 6:Gold imports in India. Data obtained from [7]

The Indian economy has been slowing down since the last couple of years. In their struggle to

control inflation, the policy makers appear to have paid less attention to growth, which too has

slumped.GDP growth has been slowing and Morgan Stanley recently reduced its expectations of

Indian GDP growth down to 4%. The currency has been gradually depreciating against the US dollar

and recently started rolling down the hill sending the policy makers into a panic.

Adding to the countrys woes are the global economic parameters. USA has started withdrawing the

stimulus resulting in a net outflow of money from the country. With the currency having depreciatedmore than 35% in the last couple of years, continuous high inflation and GDP growth that has been

falling, investors may not be too keen to invest into the country.

Gold is the number two imported commodity after oil [5]. Since oil is an essential commodity,

reducing gold imports seems is the most logical step towards controlling the falling rupee and

reducing the increasing current account deficit. The Indian government and RBI took a series of

measures to curb the import of gold.

0

200

400

600

800

1000

1200

2006 2007 2008 2009 2010 2011 2012 2013*

Gold Imports in India in tonnes

Actual so far Predicted w/o policy measures


17/32


5.Gold PriceGold price variation with GDP in India

Gross domestic product (GDP) is the market value of all officially recognized final goods and services

produced within a country in a given period of time. In our quest for determining whether gold can

be considered as a proxy for key macroeconomic indicators we here analyze 34 years worth of GDP

and Gold price data ranging from 1979 to 2011

Figure 7: Gold Price and Gross Domestic Product data of India during 1979-2011Sources:

[9]www.goldprice.org

Above graph shows that gold prices as well as Indias Gross Domestic Product have increased during

past 3 decades. However you can notice the difference in the pattern of growth of the two entities.

GDP growth has been at a steady constant pace whereas Gold prices grew slowly in the first two

decades 1980-2000 and then in the latest decade picked up pace and the trend is almost vertical

sloped growth curve.

The figure below shows a scatter plot and the line of regression. Value of coefficient of

determination R-square 0.8593 suggests a high degree of correlation.

0.0

10,000.0

20,000.0

30,000.0

40,000.0

50,000.0

60,000.0

70,000.0

80,000.0

90,000.0

100,000.0

500,000

1,500,000

2,500,000

3,500,000

4,500,000

5,500,000

6,500,000

India - Gold Price And GDP

GDP Gold Price per troy ounce
http://www.goldprice.org/http://www.goldprice.org/http://www.goldprice.org/http://www.goldprice.org/


18/32


Figure 8: Regression of GDP on gold prices over 1979-2011. Sources: [9]www.goldprice.org

Gold price variations with Current Account Deficit in IndiaA deficit on the current account means that India has to pay out more than it receives on

export/import transactions. After Oil imports for transport and industry purposes Gold has been the

major item on Indias import bill. Here we try to figure is there any correlation between Gold prices

and current account deficit in India.

y = 63.327x + 1E+06

R = 0.8593

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

7,000,000

8,000,000

0.0 10,000.020,000.030,000.040,000.050,000.060,000.070,000.080,000.090,000.0100,000.0

GDP

Gold Price

GDP Versus Gold Price


19/32


Figure 9: Gold Price and Current Account Deficit of India during 2000-2011Sources:

[9]www.goldprice.org,BOP.xls shared by Prof. Chandan Sharma

Above graph suggests that gold prices as well as Indias current account deficit have increased at a

steady pace in the last decade and the growth seems to be accelerated towards the end. The figure

below shows a scatter plot and the line of regression. Value of coefficient of determination R-square

0.9489 suggests a high degree of correlation which means Gold prices have had a significant impact

on Indias Current Account Deficit.

-20000

0

20000

40000

60000

80000

100000

0.0

10,000.0

20,000.0

30,000.0

40,000.0

50,000.0

60,000.0

70,000.0

80,000.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

India - Gold Price and Current Account Deficit

Gold Price Per Troy Ounce (INR) Current Account Deficit (Million USD)
http://www.goldprice.org/http://www.goldprice.org/http://www.goldprice.org/


20/32


Figure 10: Regression of Current Account Deficit on gold prices over 2000-2011. Sources:

[9]www.goldprice.org

y = 1.3168x - 22900

R = 0.9489

-20000

0

20000

40000

60000

80000

100000

0.0 10,000.0 20,000.0 30,000.0 40,000.0 50,000.0 60,000.0 70,000.0 80,000.0

CAD

Gold Price

Current Account Deficit (Million USD)


21/32


Gold price variations compared with Oil price variations

Oil and gold form the number one and two imported commodities in India. How do their prices

correlate?

Figure 11: Comparing oil and gold prices over the last 20 years. Data sources: [9]www.eia.gov,

www.goldprice.org

As can be seen from the above graph, oil prices have been far more volatile than gold prices. It can

be seen than there is a gradual increase in prices of both commodities. The figure below shows a

scatter plot and the line of regression. Except for the oil spike of 2008, the prices of these two

commodities exhibit a considerable degree of correlation.

0

20

40

60

80

100

120

140

160

0

200

400

600

800

1000

1200

1400

1600

1800

2000

Jan-9

3

Jan-9

4

Jan-9

5

Jan-9

6

Jan-9

7

Jan-9

8

Jan-9

9

Jan-0

0

Jan-0

1

Jan-0

2

Jan-0

3

Jan-0

4

Jan-0

5

Jan-0

6

Jan-0

7

Jan-0

8

Jan-0

9

Jan-1

0

Jan-1

1

Jan-1

2

Jan-1

3

Oilprice-$perbarrel

Goldp

rice-$pertroyounce

Comparing Oil and Gold prices over 20 years

GOLD PRICE OIL PRICE
http://www.eia.gov/http://www.eia.gov/http://www.eia.gov/http://www.goldprice.org/http://www.goldprice.org/http://www.goldprice.org/http://www.eia.gov/


22/32


Figure 12: Regression of Oil prices on gold prices over last 20 years price data. Data sources: [9]

www.eia.gov,www.goldprice.org

However, the same analysis, when done over a period of last one and a half years bring out a totally

different results. R2is 0.06 which indicates that there is absolutely no correlation between the two

prices in the recent one and a half years.

y = 0.0589x + 9.8843R = 0.7166

0

20

40

60

80

100

120

140

160

0 200 400 600 800 1000 1200 1400 1600 1800 2000

Oilprice-$perbarrel

Gold price - $ per troy ounce

Oil Price vs. Gold price - 20 years

60

70

80

90

100

110

120

1000

1100

1200

1300

1400

1500

1600

1700

1800

1900

Jan-1

2

Feb-1

2

Mar-12

Apr-12

May-1

2

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-12

Nov-1

2

Dec-1

2

Jan-1

3

Feb-1

3

Mar-13

Apr-13

May-1

3

Jun-1

3

Jul-13

Aug-1

3

Oilprice-$p

erbarrel

Goldprice-$pe

rtroyounce

Comparing Oil and Gold prives over 1.5 years

GOLD PRICE OIL PRICE
http://www.eia.gov/http://www.eia.gov/http://www.goldprice.org/http://www.goldprice.org/http://www.goldprice.org/http://www.goldprice.org/http://www.eia.gov/


23/32


Figure 13: Comparing oil and gold prices over the last 1.5 years. Data sources: [9]www.eia.gov,

www.goldprice.org

Figure 14: Regression of Oil prices on gold prices over last 1.5 years price data. Data sources: [9]www.eia.gov,www.goldprice.org

Comparison of gold prices in USD and INR

The following chart compares the prices for gold in USD with the price in INR, expressed after

adjusting for the exchange rate. The adjusted price in INR was calculated by dividing the price in INR

by the prevalent exchange rate. The chart below shows the difference between the price in USD and

the adjusted INR price as a percentage of the USD price.

y = -5.1137x + 2076.9

R = 0.0628

1000

1100

1200

1300

1400

1500

1600

1700

1800

1900

60 70 80 90 100 110 120

Oilprice-$perbarrel

Gold price - $ per troy ounce

Oil Price vs. Gold price - 1.5 years
http://www.eia.gov/http://www.eia.gov/http://www.eia.gov/http://www.goldprice.org/http://www.goldprice.org/http://www.eia.gov/http://www.eia.gov/http://www.goldprice.org/http://www.goldprice.org/http://www.goldprice.org/http://www.goldprice.org/http://www.eia.gov/http://www.goldprice.org/http://www.eia.gov/


24/32


25/32


6.Policy instruments regulating gold prices/demandEarlier attempts at controlling gold import The Gold control Act

After the Sino-Indian War in 1962, due to loss of foreign exchange reserves, the government of India

enacted the Gold Control Rules, 1963, prohibiting the citizens from holding pure gold bars and coins.

The old holdings in pure gold had to be compulsorily converted into jewellery and that had to be

declared. Only licensed dealers were allowed to deal in pure gold bars and coins. New gold jewellery

purchases were either recycled or smuggled gold. This legislation killed the official gold market and a

large unofficial market sprung up dealing in cash only.

The gold was smuggled in and sold through the unofficial channel wherein, many jewelers and

bullion traders traded in smuggled gold. A huge black market developed for gold. Gold Smiths were

an unorganized labour force and could not cope with the new developed situation. Only a few couldget the license to hold the gold, that also in very small quantity, with the result that the members of

Khudabadi Sindhi Swarankar community, who were depending only on their traditional occupation

of making gold ornaments, lost their business and their financial condition deteriorated and families

shattered.

In 1990, India had a major foreign exchange problems and was on verge of default on external

liabilities. The Indian Govt. pledged 40 tons gold from their reserves with the Bank of England and

saved the day. Subsequently, India embarked upon the path of economic liberalization. The era of

licensing was gradually dissolved. The gold market also benefited because the government abolished

the 1962 Gold Control Act on 6 June 1990 and liberalized the gold import into India on payment of aduty of Rs.250 per ten grams. The government thought it more prudent to allow free imports and

earn the taxes rather than to lose it all to unofficial channel. From official imports of practically

nothing in 1991, India officially imported more than 110 tonnes of gold in 1992, which now stands

about 800 tonnes in a year.

In September 1999, the Govt. of India launched a Gold Deposit Scheme to utilize the idle gold and

simultaneously give a return to gold owners and reduce the country's reliance on imports. However,

this plan was not widely accepted by the population. [4]

Current attempts at controlling gold import

Measure taken by domestic organizations trading in gold

All India Gems and Jewellery Trade Federation, Indias largest jewelersassociation has asked its

members to stop selling gold bars and coins. This is in spite of the fact that gold bars and coins make

up about 35% of their business. Similarly, Reliance Capital has abruptly halted gold sales and

investments in its gold-backed funds, saying that it is committed to support all policy objectives of

the government and the RBI. Similar moves are expected from other institutions and organizations.


26/32


27/32


June 3: India imported around 162 tonnes of gold in May, a finance ministry official says. This was

much more than expected.

June 4: The RBI takes tougher measures, saying domestic jewellers can only buy gold on a cash

basis. By doing this, the central bank makes the overseas purchase of gold a cash and carry business.

Shares of jewellery makers fall.

June 5: Another gold import duty hike. The government increases the import duty on gold to 8%

from 6%.A government official says the next day that it might take more steps to curb gold inflows.

June 21: Reliance Capital abruptly halts gold sales and investments in its gold-backed funds , saying

it is committed to support all policy objectives of the government and the RBI.

June 24: Indias biggest jewellers association All India Gems and Jewellery Trade Federation

asks members to stop selling gold bars and coins, which makes up about 35% of their business.

June 25: The RBI tells rural regional banks that they can no longer provide loans against gold

jewellery and coins.

June 27: The RBI rules out any credit transactions for gold imports unless they are intended to make

jewellery for export.

August: Government further increases import duty to 10%


28/32


7.Expected impact on the economyAmong the factors we have considered so far, the ones aiding the Governments initiative to curb

gold import are

- Depreciation of the Rupee- Measure taken by domestic organizations trading in gold- Central banks buying gold- Indian Government considering buying back gold- Appeals to the people of the country- Threat of Syrian invasion by the west (though the overall impact on the economy will be

negative)

And those going against are

- Drop in global Gold prices- Traditional demand for gold in the country- Increase in smuggling

Considering the impact of both the positive and negative factors listed above, it would be expected

that the demand for gold in the country will gradually subside. Morgan Stanley has estimated that

the import of gold for rest of 2013 will be between 200 to 300 tonnes, down from the 562 tonnes

imported in the first 6 months [11].


29/32


8.Future Uses of GoldGold is a very expensive material and is used only when its unique qualities are of some use i.e. no

other substitutes could be identified. Most of the uses of gold have developed during the last two or

three decades. This trend will likely continue till our society discovers some other substitutes. But

analyzing the current scenario, it seems the combination of growing demand of gold, few substitutesand limited supply will cause the value and importance of gold to increase steadily over time. It is

truly a metal of the future.

Substitutes for Gold and Reductions in Use

Because of its high price and rarity manufacturers are always looking for ways to reduce the amount

of gold required to make any object or substitute with a less expensive metal. Base metals clad with

gold alloys have been used since long as a way to reduce the amount of gold used in jewelry and

electrical connections. Attempts are being made to use these items so as to reduce the amount of

gold required and to maintain their utility standards. Silver, Platinum, and platinum and are the most

common substitutes for gold that closely retain its desired properties.


30/32


9.Conclusion and RecommendationsIn the above sections we tried exploring the relation of Gold price in India with other

macroeconomic indicators such as GDP, Current Account Deficit, etc. We found a high degree of

correlation between Gold Price and GDP as well as Gold Price and Current Account Deficit.

We compared the price of gold, the number two imported commodity in India with the price of oil,

the number one imported commodity over the years. We also compared the price of gold in INR and

USD, after adjusting for the exchange rate. The plots revealed quite a few interesting observations.

When comparing the prices of gold with that of oil, it was seen that though the prices of these two

commodities have a high degree of correlation over the longer term, they exhibit no correlation over

the short term, especially the recent 1.5 years that were analyzed.

The comparison of gold prices in USD and INR also revealed an interesting observation. It pointed to

the reduced correlation between the gold prices in INR and USD 2008 onwards. It was observed that

the exchange rate for INR became more volatile since 2008. The observed fluctuations in the gold

price can partly be attributed to the fact that the gold prices take some time to adjust to the

changed exchange rate. Thus gold price change always lags exchange rate change. However, the gold

prices could not quickly follow the rapidly changing exchange rate since 2008 and hence this lag

becomes more apparent and pronounced.

The chart below shows the rate of change of exchange rate over the same period.

Figure 16:Comparison of gold prices in USD and INR adjusted for the exchange rate. Exchange rate

data Data source: [10] www.quandl.com.

-6%

-4%

-2%

0%

2%

4%

6%

8%

Oct-93

Oct-94

Oct-95

Oct-96

Oct-97

Oct-98

Oct-99

Oct-00

Oct-01

Oct-02

Oct-03

Oct-04

Oct-05

Oct-06

Oct-07

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

% change in exchange rate (USD/INR) - over 20

years


31/32


The section on Gold in India explored Indias love for gold, gold imports in the country, various forms

of regulations that have been and are being put in place on gold imports and more importantly, the

impact of these regulations on the demand of gold. The section also explored some side effects of

these regulations.

As mentioned earlier, 75% of the gold bought in India is bought for the occasion of weddings. It willbe interesting to see the trends in gold demand during the wedding season. The limit on the quantity

of gold being imported could lead to shortages. Increased pressure on gold can be released to some

extent by recycled gold. However, the threat of increase in the volume of shadow dealings in Gold

cannot be ruled out. The domestic price of gold will continue to rise.

An estimated 31,000 tonnes of gold is commercially available in India. Thus, gold valued more than

94,00,000 crores is sitting idle in India. In addition to this the quantity of ancestral gold, which is the

gold that has been handed down through generations, is difficult to estimate. A fraction of this gold

can be used to wipe off the countrys CAD.


32/32

10. References[1]http://articles.economictimes.indiatimes.com/2013-05-16/news/39310490_1_jewellery-

demand-gold-demand-world-gold-council

[2]http://www.gold.org

[3]http://en.wikipedia.org/wiki/Gold_reserve

http://www.gold-eagle.com/article/indias-love-gold-1

[4]http://en.wikipedia.org/wiki/Gold_Control_Act

[5]http://www.hindustantimes.com/business-news/Markets/Timeline-India-s-love-for-gold-and-

the-government-s-efforts-to-curb-it/Article1-1083825.aspx

[6]http://www.hindustantimes.com/business-news/Markets/Timeline-India-s-love-for-gold-and-

the-government-s-efforts-to-curb-it/Article1-1083825.aspx

[7]http://www.equitymaster.com/5minWrapUp/charts/index.asp?date=07/13/2012&story=1&title=

How-much-gold-does-India-import

[8]http://in.reuters.com/article/2013/08/12/india-gold-idINDEE97B0AD20130812 [9]www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm

[10]http://www.quandl.com/OANDA-OANDA-Corporation/USDINR-Currency-Exchange-Rate-USD-

vs-INR

[11]http://www.firstpost.com/investing/how-india-has-upped-its-ante-in-drive-to-restrict-gold-

imports-982875.html

[12]http://indiatoday.intoday.in/story/gold-govt-to-buy-gold-from-citizens-gold-prices-indian-

rupee-sensex-silver/1/304512.html

[13]http://indiatoday.intoday.in/story/gold-govt-to-buy-gold-from-citizens-gold-prices-indian-

rupee-sensex-silver/1/304512.html

[15] http://en.wikipedia.org/wiki/Gold_as_an_investment

[16] http://www.onemint.com/2012/01/26/which-countries-does-india-import-its-gold-from/
http://articles.economictimes.indiatimes.com/2013-05-16/news/39310490_1_jewellery-demand-gold-demand-world-gold-councilhttp://articles.economictimes.indiatimes.com/2013-05-16/news/39310490_1_jewellery-demand-gold-demand-world-gold-councilhttp://articles.economictimes.indiatimes.com/2013-05-16/news/39310490_1_jewellery-demand-gold-demand-world-gold-councilhttp://articles.economictimes.indiatimes.com/2013-05-16/news/39310490_1_jewellery-demand-gold-demand-world-gold-councilhttp://www.gold.org/http://www.gold.org/http://www.gold.org/http://en.wikipedia.org/wiki/Gold_reservehttp://en.wikipedia.org/wiki/Gold_reservehttp://en.wikipedia.org/wiki/Gold_reservehttp://www.gold-eagle.com/article/indias-love-gold-1http://www.gold-eagle.com/article/indias-love-gold-1http://en.wikipedia.org/wiki/Gold_Control_Acthttp://en.wikipedia.org/wiki/Gold_Control_Acthttp://en.wikipedia.org/wiki/Gold_Control_Acthttp://www.hindustantimes.com/business-news/Markets/Timeline-India-s-love-for-gold-and-the-government-s-efforts-to-curb-it/Article1-1083825.aspxhttp://www.hindustantimes.com/business-news/Markets/Timeline-India-s-love-for-gold-and-the-government-s-efforts-to-curb-it/Article1-1083825.aspxhttp://www.hindustantimes.com/business-news/Markets/Timeline-India-s-love-for-gold-and-the-government-s-efforts-to-curb-it/Article1-1083825.aspxhttp://www.hindustantimes.com/business-news/Markets/Timeline-India-s-love-for-gold-and-the-government-s-efforts-to-curb-it/Article1-1083825.aspxhttp://www.hindustantimes.com/business-news/Markets/Timeline-India-s-love-for-gold-and-the-government-s-efforts-to-curb-it/Article1-1083825.aspxhttp://www.hindustantimes.com/business-news/Markets/Timeline-India-s-love-for-gold-and-the-government-s-efforts-to-curb-it/Article1-1083825.aspxhttp://www.hindustantimes.com/business-news/Markets/Timeline-India-s-love-for-gold-and-the-government-s-efforts-to-curb-it/Article1-1083825.aspxhttp://www.hindustantimes.com/business-news/Markets/Timeline-India-s-love-for-gold-and-the-government-s-efforts-to-curb-it/Article1-1083825.aspxhttp://www.equitymaster.com/5minWrapUp/charts/index.asp?date=07/13/2012&story=1&title=How-much-gold-does-India-importhttp://www.equitymaster.com/5minWrapUp/charts/index.asp?date=07/13/2012&story=1&title=How-much-gold-does-India-importhttp://www.equitymaster.com/5minWrapUp/charts/index.asp?date=07/13/2012&story=1&title=How-much-gold-does-India-importhttp://www.equitymaster.com/5minWrapUp/charts/index.asp?date=07/13/2012&story=1&title=How-much-gold-does-India-importhttp://in.reuters.com/article/2013/08/12/india-gold-idINDEE97B0AD20130812http://in.reuters.com/article/2013/08/12/india-gold-idINDEE97B0AD20130812http://in.reuters.com/article/2013/08/12/india-gold-idINDEE97B0AD20130812http://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htmhttp://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htmhttp://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htmhttp://www.quandl.com/OANDA-OANDA-Corporation/USDINR-Currency-Exchange-Rate-USD-vs-INRhttp://www.quandl.com/OANDA-OANDA-Corporation/USDINR-Currency-Exchange-Rate-USD-vs-INRhttp://www.quandl.com/OANDA-OANDA-Corporation/USDINR-Currency-Exchange-Rate-USD-vs-INRhttp://www.quandl.com/OANDA-OANDA-Corporation/USDINR-Currency-Exchange-Rate-USD-vs-INRhttp://www.firstpost.com/investing/how-india-has-upped-its-ante-in-drive-to-restrict-gold-imports-982875.htmlhttp://www.firstpost.com/investing/how-india-has-upped-its-ante-in-drive-to-restrict-gold-imports-982875.htmlhttp://www.firstpost.com/investing/how-india-has-upped-its-ante-in-drive-to-restrict-gold-imports-982875.htmlhttp://www.firstpost.com/investing/how-india-has-upped-its-ante-in-drive-to-restrict-gold-imports-982875.htmlhttp://indiatoday.intoday.in/story/gold-govt-to-buy-gold-from-citizens-gold-prices-indian-rupee-sensex-silver/1/304512.htmlhttp://indiatoday.intoday.in/story/gold-govt-to-buy-gold-from-citizens-gold-prices-indian-rupee-sensex-silver/1/304512.htmlhttp://indiatoday.intoday.in/story/gold-govt-to-buy-gold-from-citizens-gold-prices-indian-rupee-sensex-silver/1/304512.htmlhttp://indiatoday.intoday.in/story/gold-govt-to-buy-gold-from-citizens-gold-prices-indian-rupee-sensex-silver/1/304512.htmlhttp://indiatoday.intoday.in/story/gold-govt-to-buy-gold-from-citizens-gold-prices-indian-rupee-sensex-silver/1/304512.htmlhttp://indiatoday.intoday.in/story/gold-govt-to-buy-gold-from-citizens-gold-prices-indian-rupee-sensex-silver/1/304512.htmlhttp://en.wikipedia.org/wiki/Gold_as_an_investmenthttp://www.onemint.com/2012/01/26/which-countries-does-india-import-its-gold-from/http://www.onemint.com/2012/01/26/which-countries-does-india-import-its-gold-from/http://en.wikipedia.org/wiki/Gold_as_an_investmenthttp://indiatoday.intoday.in/story/gold-govt-to-buy-gold-from-citizens-gold-prices-indian-rupee-sensex-silver/1/304512.htmlhttp://indiatoday.intoday.in/story/gold-govt-to-buy-gold-from-citizens-gold-prices-indian-rupee-sensex-silver/1/304512.htmlhttp://indiatoday.intoday.in/story/gold-govt-to-buy-gold-from-citizens-gold-prices-indian-rupee-sensex-silver/1/304512.htmlhttp://indiatoday.intoday.in/story/gold-govt-to-buy-gold-from-citizens-gold-prices-indian-rupee-sensex-silver/1/304512.htmlhttp://www.firstpost.com/investing/how-india-has-upped-its-ante-in-drive-to-restrict-gold-imports-982875.htmlhttp://www.firstpost.com/investing/how-india-has-upped-its-ante-in-drive-to-restrict-gold-imports-982875.htmlhttp://www.quandl.com/OANDA-OANDA-Corporation/USDINR-Currency-Exchange-Rate-USD-vs-INRhttp://www.quandl.com/OANDA-OANDA-Corporation/USDINR-Currency-Exchange-Rate-USD-vs-INRhttp://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htmhttp://in.reuters.com/article/2013/08/12/india-gold-idINDEE97B0AD20130812http://www.equitymaster.com/5minWrapUp/charts/index.asp?date=07/13/2012&story=1&title=How-much-gold-does-India-importhttp://www.equitymaster.com/5minWrapUp/charts/index.asp?date=07/13/2012&story=1&title=How-much-gold-does-India-importhttp://www.hindustantimes.com/business-news/Markets/Timeline-India-s-love-for-gold-and-the-government-s-efforts-to-curb-it/Article1-1083825.aspxhttp://www.hindustantimes.com/business-news/Markets/Timeline-India-s-love-for-gold-and-the-government-s-efforts-to-curb-it/Article1-1083825.aspxhttp://www.hindustantimes.com/business-news/Markets/Timeline-India-s-love-for-gold-and-the-government-s-efforts-to-curb-it/Article1-1083825.aspxhttp://www.hindustantimes.com/business-news/Markets/Timeline-India-s-love-for-gold-and-the-government-s-efforts-to-curb-it/Article1-1083825.aspxhttp://en.wikipedia.org/wiki/Gold_Control_Acthttp://www.gold-eagle.com/article/indias-love-gold-1http://en.wikipedia.org/wiki/Gold_reservehttp://www.gold.org/http://articles.economictimes.indiatimes.com/2013-05-16/news/39310490_1_jewellery-demand-gold-demand-world-gold-councilhttp://articles.economictimes.indiatimes.com/2013-05-16/news/39310490_1_jewellery-demand-gold-demand-world-gold-council

gold as a macroeconomic variable in indian context

Documents