Into Recent Developments in Gold Prices - Research Paper Example

Research into Recent Developments in Gold Prices Table of Contents Question 1a 3 Fluctuations in the Gold Price during 2008 and 2009 3 Probable Causes for Gold Price Fluctuations 4 Question 1b 5 Rapid and Sustained Rise in Gold Price 5 Gold Price in August 2011 and the Causes of the Fluctuations 5 Supply And Demand Diagram Along With Price Fluctuations of Gold in 2010-11 6 Question 2 7 Answer to a and b: Mid-Point Elasticity of Demand 7 Answer to c and d: Mid-Point Elasticity of Demand 8 Answer to e 9 References 10 Question 1a Fluctuations in the Gold Price during 2008 and 2009 Gold, as an asset has a growing significance in the current market scenario. It is termed to be quite secured if treated as an investment as well. One of the major reasons behind illustrating the purchase and sell of gold as a secured investment idea is that the price of the commodity has been witnessed to grow constantly at a sustainable rate eradicating the risk of sheer and sudden fall in its prices (Barsky & Summers, “Gibson’s Paradox and the Gold Standard”). However, the gold prices were observed to fall in the year 2008 in comparison to that of the year 2007 in a highly oscillated manner. As can be observed from the chart 1 below, the price of gold was recorded to be around USD 800 per OZ to USD 850 per OZ from the month of December 2007 to the month of January 2008. The price also reached nearly the highest amount of USD 1000 per OZ in the Q1 of 2008, but by the Q2 of 2008 (i.e. August), the price fell below USD 750 per OZ which was indeed a sheer fluctuation. By 2009, the price again started rising which was recorded to be greater than USD 1100 per OZ and continued increasing which redefined the gold investment market to be stable and secured. Chart 1: Gold Price Fluctuations from 2007 to 2009 Source: (World Gold Council, “Interactive Gold Price Chart and Downloads”; Kitco Metals Inc, “Historical Gold”) Probable Causes for Gold Price Fluctuations According to the experts, there can be a few significant causes for the fluctuations in gold price in the months of 2008 and 2009. One of the major reasons had been the ill-effect of ‘inflation and deflation’ as a consequence of the recent financial turmoil in 2008. Due to this reason, the supply and demand unequivocally influences the gold price. In comparison to other assets, gold reserve was recorded to be higher during the fiscal period of 2007-2008. But due to the sudden fall in the demand of gold as a consequence of the financial fluctuations, the price of the commodity was reduced to encourage its consumption and proper allocation of the reserves (Connecticut Gold Buyers, “Why the Price of Gold Changes”; World Gold Council, “The Impact of Inflation and Deflation on the Case for Gold”). Thus, financial disruptions and imbalances between the supply and demand ratios were the major causes of gold price fluctuations during the period. Question 1b Rapid and Sustained Rise in Gold Price Relating the context of recession to the price changes of gold in the international market, it can be stated that the revitalization of demand for the commodity in the recovery period of 2010-2011 led to the sustained and rapid rise in gold price. With gradually stabilizing demand along with the Customer Price Index (CPI) in major economies including US and UK, the purchase rate of gold also increased which further augmented gold prices to maintain balances in its supply and demand ratios (Klapwijk, “Gold Survey 2011”). Gold Price in August 2011 and the Causes of the Fluctuations Source: (World Gold Council, “Interactive Gold Price Chart and Downloads”) With reference to the above presented chart, it can be apparently noted that gold price augmented rapidly during the month of August, 2011. For instance, the average gold price was recorded as USD 1572.81 per OZ for the month of July 2011 which increased to USD 1755.81 per OZ in the month of August 2011 (Kitco Metals Inc, “Historical Gold”). It is in this context that gold suppliers intended to foster the reserves of the commodity encouraging production as well as recycling following the recovery of the financial market. Although, a 7% increase in the mine production was witnessed, the recycling activity made negative contribution of 3% in comparison to the previous year. On the similar context, the demand for gold was also rising steeply in the previous quarters of the year, i.e. 971.70 tons in Q1 and 919.80 tons in Q2 (World Gold Council, “Demand And Supply Statistics”). Therefore, in order to maintain the balance in the supply of gold having lesser growth rate than the demand, the price of the commodity increased rapidly during the month of August 2011. Supply And Demand Diagram Along With Price Fluctuations of Gold in 2010-11 It is to be mentioned, the supply for gold in the world market was recorded to be 2500 tonnes in the year 2010 and is anticipated to be 2550 tonnes by the end quarter of 2011. In addition, the demand for gold in the international market was 3999.2 tonnes in 2010 which is further anticipated to decrease to 3783 tonnes in 2011 but will have a sustainable growth throughout the year. However, from the above mentioned data it becomes quite apparent that supply is much lesser than the overall demand due to which the price of the commodity can be witnessed to rise rapidly during 2010, continuing its growth in 2011 as well (Kitco Metals Inc, “Historical Gold”; World Gold Council, “Demand and Supply Statistics”). Question 2 Answer to a and b: Mid-Point Elasticity of Demand Formula: [(B2-B1) x (A2+A1)] / [(B2+B1) x (A2-A1)] Here, B2 = £1.90; B1 = £1.80; A2 = 4,800,000; A1 = 5,000,000 The price elasticity of demand will be, (0.1 x 9,800,000) / (3.7 x -200,000) = 980,000 / 740,000 = 1.32 > 1 Thus, there is strong price elasticity of demand when price changes from £1.80 to £1.90. This might be the result of increasing demand for substitute products of National Sunday Newspapers, such as electronic media or other newspapers. That is, when the price of National Sunday Newspaper rises, consumers tend to switch to other options depicting relatively lower switching cost. Answer to c and d: Mid-Point Elasticity of Demand Formula: [(B2-B1) x (A2+A1)] / [(B2+B1) x (A2-A1)] Here, B2 = £2.10; B1 = £2.00; A2 = 4,100,000; A1 = 4,600,000 The price elasticity of demand will be, (0.1 x 8,700,000) / (4.10 x -500,000) = 870,000 / 2,050,000 = 0.42 < 1 Being less than 1, the result depicts that the price elastic of demand for National Sunday Newspaper was inelastic when price increased from £2.10 to £2.00 during 2008 and 2009. One of the major causes for such inelasticity can be stated as the occurrence of financial turmoil during the period which increased the switching cost of buyers restricting them to opt for other available options. Answer to e Formula: [(B2-B1) x (A2+A1)] / [(B2+B1) x (A2-A1)] Here, B2 = £2.20; B1 = £2.20; A2 = 3,800,000; A1 = 3,900,000 The price elasticity of demand will be, (0 x 7,700,000) / (4.40 x -100,000) = 0 / 440,000 = 0 < 1 The result obtained in this case imply that there exists an inelasticity of demand for National Sunday Newspapers which depict that the demand for the product is decreasing either by getting influenced due to reduction in the consumer purchase power or because of availability of substitutes. If this was the case in the year 2008-09, the reason for fluctuation in demand despite a stagnant price margin would be the steep reduction in consumer purchase power as the result of the recessionary effects. Similarly, in the case scenario of 2007-08, it could be stated that consumers have minimum switching costs and enjoy a wide availability of substitute products influencing them to switch to other brands. References Barsky, Robert B. & Summers, Lawrence H. “Gibson’s Paradox and the Gold Standard”. The Journal of Political Economy, Vol: 96 (1988) pp. 528-550. Connecticut Gold Buyers, “Why the Price of Gold Changes”. November 10, 2011. Gold Supply Demand, 2008. Klapwijk, Philip. “Gold Survey 2011”. November 10, 2011. GFMS, 2011. Kitco Metals Inc, “Historical Gold”. November 10, 2011. Data & Charts, 2011. World Gold Council, “Demand and Supply Statistics”. November 10, 2011. Investment, 2011. World Gold Council, “Interactive Gold Price Chart and Downloads”. November 10, 2011. Investment, 2011. World Gold Council, “The Impact of Inflation and Deflation on the Case for Gold”. Oxford Economics. Read More