In this paper, I will highlight the economic concepts and principles that we have learnt in class and relate them to Mayenkar Siddesh’s article on gold premiums. The article was published in the Reuters website on Wednesday Jun 26, 2013. The major issues addressed in this article include the doubling of the gold premiums in India, imbalances on supply and demand, ban on consignment imports, international trade (Import/Export), exchange rates and strength of the dollar, and price fluctuations.
According to the article, this considers India as the world’s biggest buyer of gold; the country currently requires its gold importers to pay upfront for inventory (Mayenkar, 2013). This has made small-scale jewelers unable to source supplies because of their limited capital. The article also highlights that due to the 8% increment on the import duty, the current account deficit may be reduced. The article continues to explain that the gold premiums doubled from $10 to $20 within a day. (Mayenkar, 2013), it also reports that the imports of gold drastically reduced over the previous months according to the report released by the finance minister. Additionally, the article addresses the strength of the U.S. dollar as the controlling factor in the pricing of the Indian and international gold markets.
In this section, I will apply the supply and demand, and costs of production concepts to the aforementioned key points.
Supply and Demand
The article discusses about the relationship between the supply and demand of gold and its effects on the prices. According to the demand and supply economics concept, when the demand exceeds supply, there would be a lot of money chasing few goods in the market leading to increment of price (Struck, 2008). Additionally, when there are limited suppliers in the market, the price of commodities tend to increase as opposed to situations where the competition is high among several suppliers. This could be because the buyers would have a rage of suppliers to choose from them. According to this article, the increment on the import duties reduced the number of suppliers and supplies of gold into the Indian market. Consequently, the suppliers could not meet the increasing demand for gold. This increased demand encouraged the suppliers to increase the price of their gold in order to balance the market.
Cost of Production
The costs of production are closely related to the costs of the products. To the gold importers, the transportation costs and import duty include some of the costs of production. Therefore, when the factors of production increases, small-scale investors will be deterred from producing these products (Reuvid, & Sherlock, 2011). In this article, small-scale jewelers retracted from the trade since they could not meet the costs of importing gold into India. Additionally, costs of production also increase the price of commodities. In order to realize profits, importers had to increase the price of gold since the import duties were also increased.
Conclusion
I agree with the author of this article. In my opinion, the author critically analyzed the causes of the doubled premiums on gold. The article clearly indicated the probable causes of this increment on the premiums, which include import duty increment ad increased demand against the limited supply. Additionally, the article appreciates the effects of international monetary policies, such as the Fed, which control pricing in the international markets.
References:
Mayenkar S., (Wed Jun 26, 2013). Gold premiums jump as physical demand outstrips supply. Reuters: Mumbai. Retrieved from http://in.reuters.com/article/2013/06/26/markets-india-gold-idINDEE95P08I20130626
Struck H., (2008). Demand and supply. Munich: GRIN Verlag.
Reuvid J., & Sherlock J. (2011). International Trade: An Essential Guide to the Principles and Practice of Export, 3rd Edition. London: Kogan Page Publishers.
