Elasticities of Gold Demand—An Empirical Analysis Using Cointegration and Error Correction Model

Abstract

This article examines the long-run and the short-run elastic relationships between price, income and gold demand. Four major gold consuming countries in the world, such as India, the USA, Europe and Japan, are included in the analysis. The study period is from January 2000 to December 2017. Using the Cointegration and Error Correction model, we found a long-run relationship between gold demand, price and income of the consumers. Price elasticity is negative and income elasticity is positive in the long run. The speed of error correction is slightly higher for India. Indian gold market takes a shorter time to get back to its equilibrium than the other major gold consuming countries. India’s overall gold consumption is relatively lesser reactive to the fluctuations in the world gold price than the other countries. Consumers in India react expeditiously in the short run and their response to the price changes is stable in the long run. More than 70 per cent of India’s gold consumption is unaffected by the price fluctuations. This behaviour eventually increases the wealth in the country. Hence the study suggests that instead of curbing the demand, new financial products may be developed to monetise the gold lying idle in the households. Various gold monetisation schemes already launched by the government should reach especially the rural section, as most of them may not be aware of these schemes. This may tend to bring a considerable amount of gold into the system. JEL: G14, Q02, Q21