This document analyzes shifts in the global gold market from 2019 to 2021. It discusses factors driving demand and supply for gold, including jewelry, investments, central bank holdings, and technology usage. Demand fell significantly in 2020 due to the pandemic but recovered in 2021. Supply also declined in 2020 and 2021 due to mining disruptions. As a result, gold prices increased over this period from $1393/oz to $1799/oz as supply became more constrained. The supply and demand for gold are both relatively price inelastic.
Authors Anna, Alisa, David & PreslavaThis article is desi.docx
1. Authors: Anna, Alisa, David & Preslava
This article is designed to analyze the cryptocurrency market
from an economical perspective during the period from 2018 to
2022 with several
instances from other timelines.
Economics & Public Policy
Equilibrium
Supply Shifts
While bitcoin supply is extremely transparent, bitcoin demand
is rather
opaque. That said, there are a few quantifiable items that we do
know
about bitcoin demand. First, we have a pretty good idea of the
number
of bitcoin transactions performed each day. Secondly, and more
importantly, it appears that fluctuations in bitcoin transaction
costs
play a major role in determining price corrections. For example,
the
number of transactions stopped growing in 2012, about one year
before bitcoin’s 2013 peak and bear market. It began to rise
again in
2014 before bitcoin prices began to recover in earnest but have
been
stagnating since the end of 2016, perhaps foreshadowing the
recent
correction.
2. Bitcoin’s demand and supply are both considered perfectly
inelastic.
The reason is very simple but before that, it is very important to
understand how bitcoin price moves and how bitcoin mining
works.
First thing first, bitcoin has its ultimate quantity of supply
which is
known by every buyer/trader/investor, which is only 21 million
of
bitcoin. Meanwhile, there are around 18 million bitcoins in
circulation. How then does the quantity of circulation go up? It
depends on the bitcoin miners, as bitcoin miners contribute their
computers’ GPU and electricity to verify the transaction among
the
decentralized network, in return, they will be rewarded with
bitcoin
from the quantity that is not in circulation (hence the quantity
of
the circulating bitcoin goes up). In the long term, the rewards
decrease, while each block is formulated the less the miners can
earn.
Published on: 22nd of March 2022 Publisher: Olga Larina
Demand Shifts
The supply inelasticity explains in large part why bitcoin is so
volatile. Items with inelastic supply show a greater
response to demand shifts than items with elastic supply. The
same is true of demand: the more inelastic the demand, the
greater the price changes in response to small fluctuations in
either supply or demand. Bitcoin’s limited and highly
inelastic supply is also a major factor driving its price
appreciation, a rise so spectacular that it can only be
appreciated
3. when seen on a log scale. In bitcoin’s first four years, supply
grew by roughly 2.5 million coins per year. Even then prices
were rising as the user community grew. Since then supply has
continued to grow but the pace has slowed substantially
while demand has occasionally dipped, even on a year-on-year
basis. Bitcoin’s limited supply and soaring price make it
difficult to be used as a medium of exchange outside of the
cryptocurrency space.
Cryptocurrencys' Impact on the Global Economy
The relationship between bitcoin prices and transaction
costs is even more compelling. This third spike in
transaction costs may be closely related to the recent
correction in bitcoin prices as high transaction costs may
play a role in causing demand for the cryptocurrency to
wither. We are not suggesting that bitcoin prices are a
function of trading costs or vice versa; however, there is
an association between the two with mutual feedback
loops. When bitcoin prices rise, eventually transaction
costs appear to rise as well. When transaction costs reach
levels that market participants can no longer bear, the
price of bitcoin often corrects. A decline in prices puts
downward pressure on transaction costs which, at least
in the past, allowed for another bitcoin bull market once
they had corrected to lower levels.
Bitcoin Price in Relations to Costs
Impact of Global Economic Events on Bitcoin Price
GEPU - Global Economic Policy Uncertainty BCP - Bitcoin
Price
Since the moment of Bitcoin was created, it was always
considered the
4. legitimate cryptocurrency which is leading the market now.
Bitcoin
works as an anchor of the market. To be more specific and
clear,
bitcoin itself can be considered as important as the s&p 500 to
the entire
stock market to the crypto market. When the price action rises,
most of
the other crypto currencies' prices will go down. Same as the
price goes
opposite.
Perspective 1: Bitcoin itself
Perspective 2: Market competition
Ultimately, it is also essential to consider the external factors
which have
been very influential to Bitcoin price actions. Which are the
political
decisions and ongoing events. Even though in 2022, many
countries
have started to legalize bitcoin as legal tender, there are still
not many
regulations regulating bitcoin and the entire crypto market.
Perspective 3: External factor
Perspective 4: Retail investor (Fomo)
The existence of forks in bitcoin serves to modify some of our
intuitions on supply. That is, while bitcoin’s supply is
fixed, the supply of cryptocurrencies is not. Indeed, rising
5. bitcoin prices incent bitcoin forks. This makes a lot of sense but
it does complicate the analysis as it is a reminder that one
should not look at bitcoin in isolation but as an anchor for the
whole cryptocurrency space.
What will happen with the Revenue and Profit of One Player in
this Market after the Indicated Shifts?
Uptrend’s price action (Firms & Organizations Individual
player, Retail investor, Long term holder & Trader)
Downtrend’s Price action (Trader & Long term holder)
Bitcoin Sideways Price (Long term staking holder)
When Bitcoin is generated profit from firms & individuals as an
investment there are several factors to consider at the
same time. But in this part when the demand & supply shift
there are three kinds of situations to be taken into
consideration which are Uptrend’s price action, Downtrend’s
price action & Sideway price action. And there are the
followings:
Khan, K., Sun, J., Derindere Koseoglu, S. and Rehman, A.,
2021. Revisiting Bitcoin Price Behavior Under Global
Economic
Uncertainty. SAGE Open, [online] 11(3), p.3-6. Available at:
<https://journals.sagepub.com/doi/full/10.1177/2158244021104
0411> [Accessed 21 March 2022].
Liu, Y., Tsyvinski, A. and Wu, X., 2019. COMMON RISK
FACTORS IN CRYPTOCURRENCY. [online]
Massachusetts: National Bureau of Economic Research, pp.15-
22. Available at:
6. <https://www.nber.org/system/files/working_papers/w25882/w2
5882.pdf> [Accessed 21 March 2022].
Putnam, B. and Norland, E., 2018. An In-Depth Look at the
Economics of Bitcoin. [online] Chicago: CME Group.
Available at: <https://www.cmegroup.com/education/featured-
reports/an-in-depth-look-at-the-economics-of-bitcoin.html>
[Accessed 21 March 2022].
Trivedi, V., 2022. With Demand Curve Growing Bitcoin May
Behave like Apple Stock: Exec. [Blog] YahooSports,
Available at: <https://sports.yahoo.com/demand-curve-growing-
bitcoin-may-135227504.html?
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mNvbS8&guce_referrer_sig=AQAAAFp8_jqSrBNGPPFH
VuLaDBuy-
yYVfedhkdA4ousSIWzbNpQRSmJEJzCB72NyQCkpMV5YQRl
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RKQ8YRVfDUAQJauhlTbPWxfDgArDLLNo9-
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[Accessed 21 March 2022].
References:
(1393 - 1268)
E
The pre-COVID equilibrium point was in the intersection of Q1
and P1 with the Demand and Supply equal to D1 and S1.
According to World Gold Council, during 2020 pandemic, the
drastic shift to the left may be seen in both Demand and
Supply. Therefore, the quantity dropped significantly, however
7. the price grew up accordingly. It may be seen from the shifts
of P1 to P2 and Q1 to Q2.
In 2021, the demand has recovered from most of the COVID-
19 losses, therefore there was a positive shift to the right from
D2 to D3. However, the supply curve shifted to the left.
Consequently, the Price has increased from P2 to P3 as well as
Quantity from Q2 to Q3, making the new equilibrium in E3
point.
Q
P
Q1Q2 Q3
P1
P2
P3
S1
S3
S2
D1
D3D2
E1E2
E3
Elasticity
Price elasticity of supply
It measures the responsiveness of a good or service to the
8. supply after the change in its market price.
Gold is a precious metal, primarily found and mined in
nature. Therefore, gold supply is limited to natural deposits
and can be described as inelastic. (Ross, 2022)
Q
P
Q1 Q2
P2
P1
(1393 - 1268)
Q
P
Q1 Q2
P1
P2
D1MR1Q1
Q
P
MC
ATC
10. P3
Economic
Profit
Deadweight Loss
Q3
ATC
(4359,4 - 4454,3)
(4359,4 + 4454,3) / 2
Gold Pre and Post - COVID-19
Demand Equilibrium
Jewellery which stands for the greatest source and accounts
for ~50% of annual gold demand
Investment in gold as in a reliable, tangible, long-term asset
which reduces volatilitiy of the investment portfolio during
market crisis
Central Banks Holdings where the US, Germany and Italy take
the first 3 places in having the largest gold reserves
Technology where ~80% of gold is used by the electronics
sector (World Gold Council, 2022)
Demand for Gold consists of 4 major components:
In 2020, the global gold market was deteriorated by pandemic
disruption while registering highest prices over a decade.
However, in 2021, the demand was recovered from most of
COVID-19 losses with 50% growth y-o-y basis
Total annual jewellery demand dropped by 34% from 2019 to
11. 2020; China and India as largest markets were the main
contributors to the decrease. In 2021, the jewellery
consumption fully recovered from COVID-19 destruction with
52% increase (skyrocketing Indian demand by 93% y-o-y
basis)
The investment demand grew up by 40% in 2020 showing the
investors' interest for gold (both Bar and Coin and ETFs) at
high risk and uncertainty, economic slowdown, low interest
rates and fiscal policy expansion. In 2021, Bars and Coins
demand consecutively grow in the scope of high global
inflation, however the outflow in ETFs was seen due to appetite
for riskier investments (vaccines roll-out) signifying the overall
43% decrease in investments
The picture of 2020 in Central Banks is divided into 2 halves:
H1 - continuous buying trend, H2 - sharp increase in sales. Yet
the buyers' number preponderates the sellers' with
predominantly emerging market economies. In 2021, central
banks added 463t to global gold reserves, 82% higher
compare to 2020
2020 gold demand for technology fell by 7% y-o-y and saw a
rapid recovery in 2021 with 9% compare to 2020 (World Gold
Council, 2022)
Supply for gold is measured predominantly from mine
production (of new gold), which accounts for 75% each year.
Annual demand,
however, requires more gold than it is initially produced
through mining, and the gap is filled by recycling existing
supplies, the
majority coming from jewellery. Almost all of the gold
currently mined is presumably still available under certain form
or another
and potentially recycled (World Gold Council,2022).
In 2019 the total supply increased by 2% y-o-y to
4,876 tones. Even though there was a positive
12. production growth seen in the leading nations' mine
producers - Russia, Turkey, Australia, mainly due to
development in greenfield and brownfield, as well as
further government support to reduce trade deficit in
gold, the growth was outweighed by the decline in other
leading nation producers - China, where the local
government implemented stricter environmental
restrictions, and Indonesia’s big mining project, which
has ceased its production for the past years. Recycled
gold supply increased significantly up to 16%, as a
regard to the annual average US dollar gold price jump
and the currency weakness in India against the dollar.
(World Gold Council, 2020)
Supply
In 2021 the recycled gold supply fell 11%, as a result of lower
gold prices in Q3 and Q4, higher demand for wedding jewellery,
and the withholding of many purchases from 2020 which have
been made this year. On the other hand, mine production
encountered issues regarding safety in China, leading to a drop
of 10%; however, many countries saw positive numbers in
their production output. Overall, total supply still continued to
decrease in 2021, with 1% decrease from the previous year
(World Gold Council, 2022).
(1393 + 1268) / 2
D = = -0.23
Total supply in 2020 fell by 4% to 4,728t, predominantly
due to pandemic disruption and lockdown restrictions.
COVID-19 impacted the mine productions, with a decline of
3%, varying in countries depending on the spread of the
virus. The most significant fall in production was 34% in
13. Papua New Guinea as a result of cessation of operation in
their biggest mine. Another attribute for fall in supply came
from the decrease of 1% in recycling gold, due to closure of
retail outlets and higher local gold prices. (World Gold
Council, 2021)
2019
According to statistics from World Gold Council, the LMBA
gold prices actually grew up during 3 years under the
consideration from $1393 per 1 oz. in 2019 to $1799 per 1 oz.
in 2021.(LBMA Precious Metal Prices, 2022) The
quantity of the demand dropped significantly in 2020 compare
to 2019 from 4359 to 3657 tonnes which signifies a
shift of demand curve to the left. However, in 2021, according
to the data mentioned in the "Demand" section,
demand achieved 4022 tonnes which symbolises the shift to the
right of the demand curve. Supply dropped in 2020
by 4 % overall which was shown on the graph. Despite the
recovery of demand in 2021, the supply continued to
drop (especially in recycled gold). Overall, the supply curve has
moved to the left twice in 3 consecutive years.
% Change in Quantity Supplied
E s =
% Change in Price
(4876,2-4772,9)
(4876,2+4772,9) / 2
(1393 + 1268) / 2
E s = = 0.23
The data was taken from World Gold Council for 2018-2019
14. As the result is <1, the conclusion that the gold supply is
price inelastic may be done
Price elasticity of demand
India is one of the major gold markets, and rising prosperity is
significantly increasing demand, as already mentioned
in the previous point. Gold plays a vital role in the country's
culture, serving as a store of value, a symbol of wealth
and prestige, and an essential component of numerous
traditions. Moreover, Indians' main reason for purchasing
gold (regardless poor or rich) is for social events, such as
weddings, where they have the saying “no gold, no
wedding”. Consequently, this high demand increases the wealth
in the country, and leads to a deficit in the current
account, forcing the government to restrict gold consumption.
However, India still remains the leader in gold
consumption worldwide, regardless of price fluctuations.
(World Gold Council, 2022)
It measures the responsiveness of a good or service to the
demand after the change in its market price.
Likewise for the supply, the demand for gold is relatively
inelastic and comparatively non-reactive to the changes in the
market prices. (Price Elasticity of Demand, 2022)
India - the biggest player in the market
% Change in Quantity Demanded
E D =
% Change in Price
Geopolitical tension is associated with high uncertainty and
therefore people tend to convert their savings
into precious metals, such as gold. It is perceived as a safe
15. haven by investors and preferred as more stable
than other stocks.
Opportunity costs can also influence especially correlated with
rising yields of bonds, as investors favour
returns on bonds more. (The Economic Times. 2022)
Gold is used not only as other financial alternatives but in a
form of jewellery as gifts, etc. Hence, demand
within final consumers is also interwoven with seasonality
factors, which usually drives the demand and
prices up during the holiday season, for instance in December.
Moreover, fluctuations in the income of the
population may also change the demand, as it is related to their
purchasing power.
The industrial use of gold also contributes to changes in
demand. Gold is being used in the production of
semiconductors chips and other details for electronics.
Therefore, demand for these products is positively
correlated with the demand for gold. Similarly, usage of gold is
drastically increasing within the aerospace
industry, boosting its demand in return. (Manhattan Gold &
Silver. 2022)
The data was taken from World Gold Council for 2018-2019
As the result is <1, the conclusion that the overall gold
demand is price inelastic may be done
It should be mentioned that the price elasticity of demand
depends on the sector of gold demand analysed
Drivers of changes in Qd
2021
Profit Maximization in Monopoly: MR=MC<P; Economic Profit
= Revenue - Explicit Costs - Opportunity Costs (Tuovila, 2020)
The Qmax for a participant in Monopoly is equal to Q1 with P1
16. in 2019. The revenue is equal to P1*Q1. The economic
profit is equal to Q1*(P1-ATC).
Due to the shift in demand to the left in 2020, the Marginal
Revenue has moved to the left as well. Therefore, the new
Qmax was found at Q2 point as well as new price in P2. Q2 and
P2 are drastically lower than Q1 and P1, respectively.
Consequently, the economic profit dropped dramatically (Graph
2020).
However, in 2021 the demand for the gold has mostly recovered
from the COVID-19 pandemic consequences, therefore
the demand shifted to the right, but still not to the same position
as in 2019.
Correspondingly, the final Qmax was found in Q3 point as well
as new market price in P3 point. Overall, the economic
profit has increased, however not to the same level as in 2019
still (Graph 2021).
2020
India’s limited mining and recycling makes it significantly
reliant on bullion imports to supply domestic demand.
Despite the high import taxes, the country’s imports are
continuing to grow in order to meet the increasing
demand. For the past seven years, Indian’s supply accounted for
86% of imports, 13% of recycled gold, and mining
being only 1%, due to further restrictions implemented by the
government, high taxational policies for mining
equipment, and closure of many mines due to COVID-19. In
2020, India’s main importers for bullion came from two
countries - Switzerland (44%) and UAE (11%). (The Economic
Times, 2022)
By: Adnan, Anastasiia, Desislava, Ivana, Magdalena, Zoia
It is without doubt that the COVID-19 financially impacted the
revenue of gold for the whole Indian market.
17. Nevertheless, the epidemic and its associated concerns may
potentially increase demand for gold in India. Due to the
relatively dramatic increase in prices of gold, people are
investing in anticipation of the next pandemic waves or
lockdowns, in terms of the ease of liquidation as social security.
(Nair, 2021)
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(World Gold Council, 2022)
(World Gold Council, 2022)
(Gold supply by purpose quarterly 2021 | Statista, 2022)
(World Gold Council, 2022)
(Average price of gold across India 2013-2021 | Statista, 2022),
(India, 2022)
