Demand for gold

Describe about the How markets Fail in New York?

Prices of gold tend to reflect the health of the economy. The gold price when high is a major concern for the world. The investors are seen to rely on gold so that they can protect investments from inflation and crisis. A fall in the price on the other hand is a signal that the economy is healthy. This is due to the investors buying more lucrative product such as bond, stocks and real estate. The supply and demand forces like that of the other commodities (Arbiter and Han, 2009) do not affect the price of gold. The main reason for this is that piling of gold is more than 60 times than that is mined every year. There is a remarkable history associated with gold. The Egyptians were the ones who have performed smelting for the first time. This was done in 3600 B.C. After thousand years later, the gold smith from Mesopotamia created carnelian beads, gold pendants shaped in leaf, lapis and many more. This was the time when gold metal fascinated humankind. The desire to own this precious metal led to war and rushes. At present, gold is not only used for the purpose of investment but there prevails a strong market of jewellery (Bayoumi, Eichengreen and Taylor, 2009). Gold is also used in many medical and electrical devices. Price of gold is a major concern and a detailed analysis is made against it in this paper.

From the global scenario, we have perceived that there is cultural, emotional and financial value attached to gold and is seen to be supported by many generations. The gold is used as fashion jewellery and helps in the management of portfolio risks and protecting of the nation’s wealth. The utilization of gold in technology, jewellery, central bank and investors implies that the gold market has risen in terms of prominence at various points in the world economic cycle (Flandreau, 2010).  The in-built nature of balancing of the market of gold creates a sustained level of demand.

 There are geographically diverse sources of gold as there is demand for gold. In the year 2014, China was the largest producer of gold. The contribution to the total production was around 15 percentages. Twenty-two percentages of the new gold that has been mined came from Asia. The contribution from South and Central America is 17 percentages of the total. The supply from North America was 15 percentages. The production of gold in Africa is also huge with 20 percentages of the production (Goldfarb, Marsh and Monecke, 2010). The region of CIS is where the new discoveries and operations are carried out for the development and growth.

Gold prices have been seen to fall over the years as provided by World Gold Council (shown in diagram). There are numerous reasons behind such fall in the price of gold. The factors are dollar value, investment, speculation and many more.

Prices of gold are seen to be affected by a number of factors. The factors are of important concern as this might affect the supply and the demand of it. Any factor that is seen too govern, the prices of gold should always be carefully monitored. We see that in some way or the other prices of gold affects every people in the economy. The factors that are of major concern are as follows:

Supply of gold

US dollar places a very crucial role in determining the price of gold. When examining the market closely, we see that the price of gold and index of dollar has a negative relationship. The primary reason for this is that the metal was used in the past as currency; the unit value of the US dollar was tied to a particular amount of gold value (Wang and Zou, 2014). This relationship did not hold during the time of great depression, World War I and the Civil war. The reason for this was to protect the reserves of gold. With the end of the Bretton Woods convention, the US dollar became a fiat currency sold and traded freely (Krugman and Obstfeld, 2009). The other reason that can be seen is that dollar and gold are termed as global currencies. The weakening of the US dollar means investors purchase more of gold to protect the dollar weakening. The strengthening of dollar means investors would invest more on US dollar.

In many articles of the Financial Press has stated the jewellery demand from particularly Asia has the capability to influence the gold prices. The increase in the income of the people specially China and India will create an increased demand and plummet the prices of gold. The growth in the economy of India will raise the level of disposable income and so would increase the demand for gold. The gold is a luxury good and so the income elasticity of demand for the commodity is greater than 1. This is the primary reason, why the increase in income there would be a larger percentages increase in the demand for gold.

In terms of the investment portfolio, gold is considered to a desirable element. Investment demand is a crucial factor determining the price of gold. It has been witnessed in the past bull markets that professional investors have the ability to influence a sustained and stable gold prices (Tcha, 2009). The bear market always witnesses a rise in demand of gold with the increase in the prices of jewellery. It is also during the time of inflation that we see that gold holds value. When the individuals and investor trusts saves more wealth in gold, there will be more demand. In the year 2006 and 2011, investment demand played a crucial factor in determining increased gold price.

When there is no inflation, the money value is retained. Inflation of 20 percentages or more will lead to lessening or loosing of the money value. It is during the time of high inflation, people are seen to swap cash for some physical asset, which helps in holding value (McEachern, 2013). The inflation proof investment is made in gold. The real interest is also an important factor.  There is chance to protect the value of money in the banks if the inflation is about 6 percentages and interest rate is of 8 percentages.

Gold is among the 92 natural occurring elements that have occurred on the earth. There is no means through which gold can be destroyed naturally. This can be dissolved in chemicals but it always remains in the state of gold. There are no magnetic properties present in gold. The metal is a good conductor of electricity (Salvatore, 2010). It is not tarnished or corroded by atmospheric oxygen or no formation of rust due to water. The metal gold is a very soft metal and ranks 2.3 on the hardness scale of 10. This means that gold has the malleability property, which means it can be squeezed, rolled, pounded and twisted in different types of shapes without breaking it (Vilches, 2010). The yellow metal can be pounded very thin making it translucent. This will make the quality of gold intact. The sheets of the gold will also make the sunlight to pass through it. This will make the metal to get heated quickly. The metal is also very ductile so it can easily be formed into wire without making it like a brittle form. The gold is drawn out so thin that a single once can be made about 35 miles in length. This will make the thread very thin, which is required in the electronic industry (Ricardo, 2011). The circuit is placed on the chip that is of the size of a pinhead. The metal has high electrical conductivity and has an extraordinary resistance to deterioration. This is why it is largely demanded in the electrical industry.  The dentists also use gold in the form of jewellery. Gold has also been used as coins during the past year. The other distinctive quality is of gold is its weight (Ransome, Emmons and Garrey, 2010). Gold is among the dense and the heaviest metals.  The specific gravity of gold is 19.6 this means that the metal weighs 19.6 times more than an equal volume of pure water. The metal gold has a melting point of 1945 degree Fahrenheit, which reflects it is a good conductor of heat.

The gold price trend over three years 2013-2015

Changes in the supply affect prices of gold. With the production level increasing, the price is seen to fall. The supply of gold is more or less stable. The disturbances in the prices are mainly due to the demand of gold.

The factors that have been stated needs to be analysed and monitored constantly to see that the economy does not face  a turmoil due to the fluctuating level of gold prices.

The term negative externality is a cost that a third party is seen to suffer when there involves economic transaction. The first and the second parties in a transaction are the producers and the consumers respectively. The third party is the one who may be individuals, property or organizations who are seen to be affected indirectly (Bird, 2009). The spill over effect is denoted by the externalities. There is an external cost incurred when there is presence of negative externality. Externalities are as waste generated from consumption or may be emissions from cars and factories (Cassidy, 2009). The situation that leads to the occurrence of externalities is when there is uncertainty over the property rights of the asset.

The use of personal car has negative externality on the environment and also affects the other people on the road. The major problem that is noted is urban flooding. This urban flooding has led to the higher demand of land required for parking on the road side and parking lots. The earth is not able to soak the rainfall and this has led to flooding more frequently. Due to the pollution and flooding, the third parties may be affected negatively. When there is negative externality, the good supplied is at equilibrium for the car industry. For the society, on the other hand has to face more road and car construction than the optimum amount (Meier and Rauch, 2014). The firms are not producing at the level of society’s optimum level. This results in the market failure and inefficiency in the system. The market failure is seen to occur when there is either over allocation or under allocation of resources (Croitoru and Sarraf, 2010). In this particular case, there is more allocation of cars and thus resulting in market failure.  Pollution from car causes many health hazards like respiratory problems and cardiovascular symptoms and illness. The more number of cars on the road for personal use will have affect on the ozone layer of the atmosphere.

Negative externality is seen to occur when there is increase in the marginal social cost over the private cost. The efficient output occurs when social cost is equal to the social benefit. The following diagram helps in representing the negative externality.

In the above diagram, the socially optimal level of output is Q1. This is because at this output level the benefit and the cost are equal. The gap in the MSC and MPC generates external cost due to pollution from cars. The net welfare loss may be due to MC getting greater than MB or MB greater than MC. The area shaded in the above diagram also reflects over consumption. The negative externality that arises from pollution through cars results in market failure (Gerardi, 2012). The individuals they do not take into consideration the cost accrued to other individuals.

Value of U.S Dollar

Environment pollution is of major concern. There are number of ways through which the environment pollution is aggravated and pollution from cars is one them (MoureÌÂ, 2011). The government must take up some steps so that the pollution from car may be lessened. The following are the policies that are adopted by the government:

The government can implement a carbon tax. This type of tax will make the producers and consumers to pay the full social cost of pollution generation (Gurjar, Molina and Ojha, 2010). A tax will help in reduction of the consumption of a particular good. The people will be afraid to buy car in the fear to pay more taxes. The following diagram will show how taxation helps in reduced consumption of cars and generation of pollution.

When there is pollution, the social marginal cost of goods generated is more than that of the private cost. The gap is the cost occurring due to pollution. When there is imposition of tax, the supply curve moves upward to S2. This makes the consumers to pay the entire SMC. This will lead to the fall in the level of consumption to Q2, which is the desired level of output for the society.

The scheme is very advantageous for the government as they are able to earn higher level of revenue (Hester and Harrison, 2012). This could also be used for implementation of any other schemes by the pollution reduction.

Tax imposition will provide incentive to the firms to build engines, which are efficient. This will help in reducing pollution. More taxes on petrol will make the consumers and the producers to move to engines, which are fuel-efficient

With the imposition of carbon taxes, the demand may be quite inelastic and petrol tax may have very marginal effect to reduce the pollution. In the long run, however the demand can be more elastic as there will be more transport preferences present for the consumers.

There may be some administrative cost involved when implementing tax yet the cost is much less than that of the environmental damage.

People never like the concept of taxation so they must be explained that the taxes are being used for a good purpose.

This is a scheme which is market based and focuses on reduction of pollution and encourages the firms to lower the level of pollution created by them. The presence of the permits will help in the lowering the level of pollution. This will help in the sale of permits to other firms. The incentives of the market will help in reducing the pollution. There might arise a problem in knowing the number of permits to be given out. When permit generated by the government is done generously, the reduction of pollution will be less and when the permit generation is restricted then there are firms complaining that output getting affected adversely. The permit does not help in measuring the amount of pollution generated. There is a chance to be secretive about the pollution generation by the firms.

Demand for the goods consumed

The internalization of the external cost is a very useful way for catering to the externality issues. When the costs are internalizing then higher and actual social price and cost is attained (Mankiw, Taylor and Ashwin, 2013). This leads to the allocation of the resources efficiently. The focus of cost internalizing is to estimate the external cost.

The property right problem of negative externalities can be resolved through the Coase Theorem put forwarded by Ronald Coase. There are two conditions involved in this case. They are well-defined property right and lower cost of transaction. The theorem suggests limited and particular dealing of the government. This is the establishment of the property rights. As per the view of Coase, the fundamental limitations of implementation of private sector solution to the externalities are seen to establish property rights poorly (Rassia and Pardalos, 2012). When there is enforcement and establishment of the property rights by the government, the private market can do the remaining part. There is another important part to this theorem. The efficient solution to an externality is not made on which party the property rights are being assigned initially .The case can be defined very simply. There should not emerge thinking that a party A is harming party B. The thinking must be in line as how the party A can be restricted or restrained. When the conflict between the two parties is about the rights of property, it should be decided who should deserve the property rights (Winston, 2012). There are some criticisms that are associated with this idea of lower transaction cost.  This is seen not to exist in the real world. The parties when they are not ready to compromise on their rights then there is a need for the government to intervene.

The negative externalities will be reduced if the government is seen to adopt the policies effectively. The personal car use is very serious problem for the environment as well as the people who walk on the road. The congestion and health issues both are on the rise and there is a requirement to look into the matter as early as possible.

Conclusion:

Thus, we see there are a number of factors that determine the prices of gold. The gold prices are very important as it affects the functioning of the economy. Gold is a precious metal so there are people who like to hold the commodity and sell when there is increase in the price of gold. The factors on which the gold is dependent are demand for gold, inflation rate, value of the US dollar and speculation. From the year 2013 to the year 2015, the gold rate has shown a declining trend. In the latter part of the assignment, we see the negative externality that occurs from the car pollution. The occurrence of the negative externality is due to the gap in the marginal social cost and marginal benefit. The government takes up possible steps to reduce the level of pollution.

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