Economics

(1393 – 1268) E

The pre-COVID equilibrium point was in the intersection of Q1 and P1 with the Demand and Supply equal to D1 and S1. According to World Gold Council, during 2020 pandemic, the drastic shift to the left may be seen in both Demand and Supply. Therefore, the quantity dropped significantly, however the price grew up accordingly. It may be seen from the shifts of P1 to P2 and Q1 to Q2. In 2021, the demand has recovered from most of the COVID- 19 losses, therefore there was a positive shift to the right from D2 to D3. However, the supply curve shifted to the left. Consequently, the Price has increased from P2 to P3 as well as Quantity from Q2 to Q3, making the new equilibrium in E3 point.

Q

P

Q1Q2 Q3

P1 P2

P3

S1

S3 S2

D1 D3D2

E1E2

E3

Elasticity Price elasticity of supply

It measures the responsiveness of a good or service to the supply after the change in its market price. Gold is a precious metal, primarily found and mined in nature. Therefore, gold supply is limited to natural deposits and can be described as inelastic. (Ross, 2022)

Q

P

Q1 Q2

P2

P1

(1393 – 1268)

Q

P

Q1 Q2

P1

P2

D1MR1Q1 Q

P

MC

ATC

P1 Economic

Profit

Deadweight Loss

ATC

Q

P

MC

ATC

MR2 D2

P2 Economic Profit

Q2

Deadweight Loss

ATC

Q

P

MC

ATC

MR3 D3

P3 Economic

Profit

Deadweight Loss

Q3

ATC

(4359,4 – 4454,3)

(4359,4 + 4454,3) / 2

Gold Pre and Post – COVID-19 Demand Equilibrium

Jewellery which stands for the greatest source and accounts for ~50% of annual gold demand Investment in gold as in a reliable, tangible, long-term asset which reduces volatilitiy of the investment portfolio during market crisis Central Banks Holdings where the US, Germany and Italy take the first 3 places in having the largest gold reserves Technology where ~80% of gold is used by the electronics sector (World Gold Council, 2022)

Demand for Gold consists of 4 major components:

In 2020, the global gold market was deteriorated by pandemic disruption while registering highest prices over a decade. However, in 2021, the demand was recovered from most of COVID-19 losses with 50% growth y-o-y basis Total annual jewellery demand dropped by 34% from 2019 to 2020; China and India as largest markets were the main contributors to the decrease. In 2021, the jewellery consumption fully recovered from COVID-19 destruction with 52% increase (skyrocketing Indian demand by 93% y-o-y basis) The investment demand grew up by 40% in 2020 showing the investors’ interest for gold (both Bar and Coin and ETFs) at high risk and uncertainty, economic slowdown, low interest rates and fiscal policy expansion. In 2021, Bars and Coins demand consecutively grow in the scope of high global inflation, however the outflow in ETFs was seen due to appetite for riskier investments (vaccines roll-out) signifying the overall 43% decrease in investments The picture of 2020 in Central Banks is divided into 2 halves: H1 – continuous buying trend, H2 – sharp increase in sales. Yet the buyers’ number preponderates the sellers’ with predominantly emerging market economies. In 2021, central banks added 463t to global gold reserves, 82% higher compare to 2020 2020 gold demand for technology fell by 7% y-o-y and saw a rapid recovery in 2021 with 9% compare to 2020 (World Gold Council, 2022)

Supply for gold is measured predominantly from mine production (of new gold), which accounts for 75% each year. Annual demand, however, requires more gold than it is initially produced through mining, and the gap is filled by recycling existing supplies, the majority coming from jewellery. Almost all of the gold currently mined is presumably still available under certain form or another and potentially recycled (World Gold Council,2022).

In 2019 the total supply increased by 2% y-o-y to 4,876 tones. Even though there was a positive production growth seen in the leading nations’ mine producers – Russia, Turkey, Australia, mainly due to development in greenfield and brownfield, as well as further government support to reduce trade deficit in gold, the growth was outweighed by the decline in other leading nation producers – China, where the local government implemented stricter environmental restrictions, and Indonesia’s big mining project, which has ceased its production for the past years. Recycled gold supply increased significantly up to 16%, as a regard to the annual average US dollar gold price jump and the currency weakness in India against the dollar. (World Gold Council, 2020)

Supply

In 2021 the recycled gold supply fell 11%, as a result of lower gold prices in Q3 and Q4, higher demand for wedding jewellery, and the withholding of many purchases from 2020 which have been made this year. On the other hand, mine production encountered issues regarding safety in China, leading to a drop of 10%; however, many countries saw positive numbers in their production output. Overall, total supply still continued to decrease in 2021, with 1% decrease from the previous year (World Gold Council, 2022).

(1393 + 1268) / 2

D = = -0.23

Total supply in 2020 fell by 4% to 4,728t, predominantly due to pandemic disruption and lockdown restrictions. COVID-19 impacted the mine productions, with a decline of 3%, varying in countries depending on the spread of the virus. The most significant fall in production was 34% in Papua New Guinea as a result of cessation of operation in their biggest mine. Another attribute for fall in supply came from the decrease of 1% in recycling gold, due to closure of retail outlets and higher local gold prices. (World Gold Council, 2021)

2019

According to statistics from World Gold Council, the LMBA gold prices actually grew up during 3 years under the consideration from $1393 per 1 oz. in 2019 to $1799 per 1 oz. in 2021.(LBMA Precious Metal Prices, 2022) The quantity of the demand dropped significantly in 2020 compare to 2019 from 4359 to 3657 tonnes which signifies a shift of demand curve to the left. However, in 2021, according to the data mentioned in the “Demand” section, demand achieved 4022 tonnes which symbolises the shift to the right of the demand curve. Supply dropped in 2020 by 4 % overall which was shown on the graph. Despite the recovery of demand in 2021, the supply continued to drop (especially in recycled gold). Overall, the supply curve has moved to the left twice in 3 consecutive years.

% Change in Quantity Supplied E s =

% Change in Price (4876,2-4772,9)

(4876,2+4772,9) / 2

(1393 + 1268) / 2

E s = = 0.23

The data was taken from World Gold Council for 2018-2019 As the result is <1, the conclusion that the gold supply is price inelastic may be done

Price elasticity of demand

India is one of the major gold markets, and rising prosperity is significantly increasing demand, as already mentioned in the previous point. Gold plays a vital role in the country’s culture, serving as a store of value, a symbol of wealth and prestige, and an essential component of numerous traditions. Moreover, Indians’ main reason for purchasing gold (regardless poor or rich) is for social events, such as weddings, where they have the saying “no gold, no wedding”. Consequently, this high demand increases the wealth in the country, and leads to a deficit in the current account, forcing the government to restrict gold consumption. However, India still remains the leader in gold consumption worldwide, regardless of price fluctuations. (World Gold Council, 2022)

It measures the responsiveness of a good or service to the demand after the change in its market price. Likewise for the supply, the demand for gold is relatively inelastic and comparatively non-reactive to the changes in the market prices. (Price Elasticity of Demand, 2022)

India – the biggest player in the market

% Change in Quantity Demanded E D =

% Change in Price

Geopolitical tension is associated with high uncertainty and therefore people tend to convert their savings into precious metals, such as gold. It is perceived as a safe haven by investors and preferred as more stable than other stocks. Opportunity costs can also influence especially correlated with rising yields of bonds, as investors favour returns on bonds more. (The Economic Times. 2022) Gold is used not only as other financial alternatives but in a form of jewellery as gifts, etc. Hence, demand within final consumers is also interwoven with seasonality factors, which usually drives the demand and prices up during the holiday season, for instance in December. Moreover, fluctuations in the income of the population may also change the demand, as it is related to their purchasing power. The industrial use of gold also contributes to changes in demand. Gold is being used in the production of semiconductors chips and other details for electronics. Therefore, demand for these products is positively correlated with the demand for gold. Similarly, usage of gold is drastically increasing within the aerospace industry, boosting its demand in return. (Manhattan Gold & Silver. 2022)

The data was taken from World Gold Council for 2018-2019 As the result is <1, the conclusion that the overall gold demand is price inelastic may be done It should be mentioned that the price elasticity of demand depends on the sector of gold demand analysed

Drivers of changes in Qd

2021

Profit Maximization in Monopoly: MR=MC<P; Economic Profit = Revenue – Explicit Costs – Opportunity Costs (Tuovila, 2020)

The Qmax for a participant in Monopoly is equal to Q1 with P1 in 2019. The revenue is equal to P1*Q1. The economic profit is equal to Q1*(P1-ATC). Due to the shift in demand to the left in 2020, the Marginal Revenue has moved to the left as well. Therefore, the new Qmax was found at Q2 point as well as new price in P2. Q2 and P2 are drastically lower than Q1 and P1, respectively. Consequently, the economic profit dropped dramatically (Graph 2020). However, in 2021 the demand for the gold has mostly recovered from the COVID-19 pandemic consequences, therefore the demand shifted to the right, but still not to the same position as in 2019. Correspondingly, the final Qmax was found in Q3 point as well as new market price in P3 point. Overall, the economic profit has increased, however not to the same level as in 2019 still (Graph 2021).

2020

India’s limited mining and recycling makes it significantly reliant on bullion imports to supply domestic demand. Despite the high import taxes, the country’s imports are continuing to grow in order to meet the increasing demand. For the past seven years, Indian’s supply accounted for 86% of imports, 13% of recycled gold, and mining being only 1%, due to further restrictions implemented by the government, high taxational policies for mining equipment, and closure of many mines due to COVID-19. In 2020, India’s main importers for bullion came from two countries – Switzerland (44%) and UAE (11%). (The Economic Times, 2022)

By: Adnan, Anastasiia, Desislava, Ivana, Magdalena, Zoia

It is without doubt that the COVID-19 financially impacted the revenue of gold for the whole Indian market. Nevertheless, the epidemic and its associated concerns may potentially increase demand for gold in India. Due to the relatively dramatic increase in prices of gold, people are investing in anticipation of the next pandemic waves or lockdowns, in terms of the ease of liquidation as social security. (Nair, 2021)

Immanuvel, S. and Lazar, D., 2020. Elasticities of Gold Demand—An Empirical Analysis Using Cointegration and Error Correction Model. Arthaniti: Journal of Economic Theory and Practice, 20(2), pp.131-142. India, P., 2022. India’s gold demand skyrockets to 797.3 tons in 2021: World Gold Council. [online] Business-standard.com. Available at: <https://www.business- standard.com/article/pti-stories/india-s-gold-demand-skyrockets-to-797-3-tons-in-2021-wgc-122012800580_1.html> [Accessed 10 May 2022]. Investopedia. 2022. Price Elasticity of Demand. [online] Available at: <https://www.investopedia.com/terms/p/priceelasticity.asp> [Accessed 9 May 2022]. LBMA. 2022. LBMA Precious Metal Prices. [online] Available at: <https://www.lbma.org.uk/prices-and-data/precious-metal-prices#/table> [Accessed 9 May 2022]. Manhattan Gold & Silver. 2022. Industrial Gold: Aerospace – Manhattan Gold & Silver. [online] Available at: <https://www.mgsrefining.com/blog/2011/01/25/industrial-gold- aerospace/#:~:text=Gold%20is%20used%20in%20aeronautical,the%20temperature%20onboard%20the%20aircraft.> [Accessed 9 May 2022]. Nair, R., 2021. India’s pandemic paradox: Poor pledge gold, rich buy more gold, pushing imports up by 200%. [online] ThePrint. Available at: <https://theprint.in/economy/indias-pandemic-paradox-poor-pledge-gold-rich-buy-more-gold-pushing-imports-up-by-200/728979/> [Accessed 9 May 2022]. Ross, S., 2022. How Does Price Elasticity Affect Supply?. [online] Investopedia. Available at: <https://www.investopedia.com/ask/answers/040615/how-does-price- elasticity-affect-supply.asp> [Accessed 9 May 2022]. Statista. 2022. Gold demand by purpose quarterly 2021 | Statista. [online] Available at: <https://www.statista.com/statistics/274684/global-demand-for-gold-by- purpose-quarterly-figures/> [Accessed 9 May 2022]. The Economic Times. 2022. How will rising bond yields affect gold as an asset class?. [online] Available at: <https://economictimes.indiatimes.com/markets/commodities/views/how-will-rising-bond-yields-affect-gold-as-an-asset-class/articleshow/62899754.cms> [Accessed 9 May 2022]. The Economic Times. 2022. India’s pandemic recovery means golden days ahead for jewelers. [online] Available at: <https://economictimes.indiatimes.com/industry/cons-products/fashion-/-cosmetics-/-jewellery/indias-pandemic-recovery-means-golden-days-ahead-for- jewelers/articleshow/86830788.cms> [Accessed 9 May 2022]. Tuovila, A., 2020. Economic Profit (or Loss) Definition. [online] Investopedia. Available at: <https://www.investopedia.com/terms/e/economicprofit.asp> [Accessed 9 May 2022]. World Gold Council. 2022. What We Do | World Gold Council. [online] Available at: <https://www.googleadservices.com/pagead/aclk?sa=L&ai=DChcSEwim- Nf1itP3AhXXjGgJHSa2BpoYABAAGgJ3Zg&ae=2&ohost=www.google.ru&cid=CAASJeRo6mO68Q5grJxRusyQlQb1AkgH0EcNZ_ILJG8z1BIVu- YsZp4&sig=AOD64_2P2G77v2K1VzewleCSdQXP6UXm1w&q&adurl&ved=2ahUKEwj8yc_1itP3AhXFzqQKHUabAWkQ0Qx6BAgDEAE&dct=1> [Accessed 9 May 2022].

References

(Gold demand by purpose quarterly 2021 | Statista, 2022)

(World Gold Council, 2022)

(World Gold Council, 2022)

(Gold supply by purpose quarterly 2021 | Statista, 2022)

(World Gold Council, 2022)

(Average price of gold across India 2013-2021 | Statista, 2022), (India, 2022)

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