By revealing, Short-term drivers of gold demand in India, the World Gold Council said recently, “Our research also reveals the key econometric factors that influence short-term demand for gold.”
1: Inflation: in common with investors around the world, Indian savers turn to gold as a hedge against inflation. For each one percentage point increase in inflation, gold demand increases by 2.6%.
2: Changes in the gold price: while steady price increases or decreases affect long-term demand, sharp price changes have an impact on short-term demand. For each 1% fall in the gold price in any given year, demand increases by 1.2%.
3: Tax regime: an increase in the rate of import duties since 2012 has depressed demand for gold by 1.2% per year.
4: Excess rainfall: while the monsoon has less of an impact on demand than in the past, it still affects consumer behaviour. A 1% increase in rainfall, compared to the long-run average, boosts gold demand by 0.2%.
Econometric model, analysis centred on gold jewellery demand, as this accounted for more than 75% of total demand for gold in India between 1990 and 2020. In general, jewellery demand is more influenced by long-term drivers while demand for gold bars and coins tends to respond more sharply to short-term factors, such as inflation or tax.
Overall, however, our model provides a useful overview of some of the key factors affecting demand for gold over both the long and the short term, particularly income, price, inflation and fiscal policy. As such, it can be used as a framework to help understand broader market trends and consider how they might influence gold demand over the coming years.