Introduction demand lies in the consumer behaviour of the


Gold is considered valuable and
precious metal across the world. Other than being used as a jewellery, Gold is
used for investment purposes and industrial purposes. Pakistan stands at second
position in terms of demand for gold. Table 1 shows the world consumer demand
for gold, according to the World Gold Council. Demand for gold in Pakistan was
42.2 tonnes in 2016, up 12% from 2015. Majority of the gold demand is in the
form of jewellery, followed by bar and coins (Figure 1).

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Table 1 Consumer demand for gold, as per World Gold

Demand for gold jewellery constitutes
most of the consumer demand lies in the consumer behaviour of the Pakistan’s
population. Gold is a commodity which represents the status in the society
therefore, more gold you possess the richer you are. Besides, gold jewellery
holds a vital sentimental value in weddings, due to which it is accumulated
over several years. The store-value of gold motivates the consumers to prefer it
over other forms of savings. Apart from gold as a consumption commodity is also
an investment. When capital markets show high volatility then, investors turn
to investments in the form of gold. Gold investments are considered safe haven
in times of capital market instability.

Figure 1 Gold jewellery, bar and coins demand

This paper attempts to study the
determinants of gold prices in Pakistan and identify the factors affecting the
gold prices. To understand the dynamics of the gold industry, a detailed study
of the industry has been conducted. Moreover, the relationship between the
inflation-adjusted gold prices and real interest rates is also assessed.

Background Study of Gold Industry

Mining & Production Process

Pakistan has deposits of several
minerals like coal, mineral salt, bauxite, chromite, copper and gold, and
semi-precious minerals like topaz, emerald and other rare earth minerals. Due
to the vast deposits of minerals, mining is an important industry for the
Pakistan’s economy. Gold in the form of placer deposits is found in rivers and
river beds in Pakistan, besides the mines. In northern areas of Pakistan, gold
panning process and other basic recovering methods are used to separate placer
gold deposits.

Gold deposits in Pakistan are found
in Saindak Copper/ Gold mine situated near Saindak and Reko Diq mines in
Baluchistan. Saindak Copper and Gold project was initiated by Saindak Metals
Ltd, Pakistan owned company. Later a contract with China Metallurgical Group
Corporation led the development of the mine. The mine has the production
capacity of 1.5 tons of gold annually. On the other hand, a Chilean copper
mining group Antofagasta PLC which has been processing the Reko Diq field
propose production of 300,000 ounces of gold annually. Recently, the Sarhad
Development authority identified mineralized horizons of gold in the region of
Chitral. In Punjab, a new gold source has been found near the district of

However, Pakistan’s immense potential
to produce gold is hindered by the inadequate and near to zero refining and
processing infrastructure. Therefore, Pakistan imports gold to satiate its
consumption and industrial needs. Figure 2 shows the total gold imports from
2006 till 2016.

Figure 2 Gold imports of Pakistan,
Pakistan Buraeu of Statistics


Since the majority of consumer demand
is for the gold jewellery therefore, this paper will consider the market
structure of the gold jewellery market. Trade Development Authority of Pakistan
(TDAP) mapped the process and stages involved in the gold jewellery
manufacturing (Figure 3). Pakistan imports 24 carats gold which is then casted
into four different categories which are 22 carats, 21 carats, 20 carats and 18
carats. After this, the casted gold is then moulded into various designs and
polished. Finally, the designs are embedded with stones.

Finished product is then either
supplied to local market, which constitutes 90% of the finished product, or
exported, which constitutes 10% of the finished product. Local market includes
wholesalers and retailers. Since the sector lacks adequate and updated
technology and infrastructure to process the gold, it produces low value-added
products which has been impeding Pakistan’s ability to penetrate international
markets through export.


Figure 3 Gold jewellery value chain
map (Source: Trade Development Authority of Pakistan)

Gold jewellery manufacturing and
retailing is a structured market but this structure is limited to clusters in
urban cities, like Karachi and Lahore. According to market sources cited by the
Ministry of Commerce, 99 percent of the manufacturing is being done in Karachi.
Punjab also constitutes the major domestic market, accounting for 70 percent of
the jewellery consumption in Pakistan. The gold jewellery market in Pakistan is
called ‘Sarafa Bazaar’ which consists of small shops, bullion dealers and
casting shops.

Retailers capture the highest margin
across the gold jewellery value chain. According to the TDAP, the retailers
calculate prices based on the following method:

& Government Institutions

Private associations relevant to gold
sector are All Pakistan Commercial Exporters of Association of Rough &
Un-Polished Precious and Semi-Precious Stones (APCEA) and All Pakistan Gems
Merchants and Jewellers Association (APGMJA). These associations are held
responsible for documents issuance for exports and visa recommendations. Also,
these associations are involved in facilitating the businesses to participate
in international trade fairs, and customs related issues. Government
institution involved in uplifting and ensuring competitiveness of gems and
jewellery sector is known as Pakistan Gems Jewellers Development Company

Export and import of gold jewellery
is regulated by government regulations termed as ‘Import and Export of Precious
Metals Jewellery and Gemstone Order 2013.’ This regulation requires all
exporters and importers to register themselves with TDAP.

Data & Methodology

The relationship of gold price with
other economic factors is well-studied in international and local research
papers.  Ghosh, D. et al (2002) studied
the monthly gold prices over the period of 1976 to 1999. This study yielded the
nominal price movements which was dominated by the short run influences. Tandon,
K. and Urich, T. (1987) determined the relationship between daily gold prices
and U.S. Money Supply and Producer Price Index. McDonald, J.G. and Solnik, B.H.
(1977) found gold bullion to be general hedge against equity investment.
Moreover, Kamran, A. and Rizvi, S.A. (2014) conducted the study for determining
the factors affecting the gold prices. They found foreign exchange rate, stock
market returns, domestic savings, silver price and per capita income to be
statistically significant.


Considering the aforementioned studies,
I have taken KSE-100 index as stock market prices, foreign exchange rate and
per capita income to determine the effect on gold prices. The data for annual
gold prices, KSE-100 index, foreign exchange rate and per capita income is
taken from State Bank of Pakistan publications. The data covers the period
starting 1996 till 2015.


This paper analyses the data using
the regression test. Foreign exchange rate, stock market prices and per capita
income are the explanatory variables therefore, the model is

Gold Price= f (KSE 100, per capita
income, forex), where KSE 100 index and per capita income are in Pakistani
Rupee, and forex (foreign exchange rate) is the rate of Pakistani Rupee per
U.S. Dollar.

The model yields coefficients for
each explanatory variable which shows the elasticity if each variable with
respect to the gold prices. Regression will help in finding the statistically
significant variables at 5% level of significance.

Results & Discussion


The table below shows the regression
output. The model has been able to explain 97.8% of the variation in gold
prices. Also, the p-value of F-statistic is below the level of significance of
5% which means the model is statistically significant.

All three explanatory variables in
the model, foreign exchange rate, KSE-10 index price and per capita income are
statistically significant as their p-value of the t-statistics is less than the
level of significance of 5%. For one unit increase in foreign exchange rate and
KSE-100 index, gold prices decline by 393.4 units and 1.26 units, respectively.
However, one unit increase in per capita income leads to 0.76 units increase in
gold prices. This represents positive relationship between gold prices and per
capita income.


three explanatory variables in the model are determinants of gold prices in
Pakistan. These factors, amongst many other factors, define the variations in
the gold prices for the selected time period of 1996 till 2015.

There exists a negative relationship
between gold prices and foreign exchange rate. A country’s currency value is
tied to its exports and imports. Keeping in view that Pakistan imports gold,
when gold prices (amongst other factors) increases internationally it becomes
expensive for Pakistan to import thus, creating trade deficit. This also means
that demand for Pakistani rupee (PKR) has declined which leads to weakening of
PKR. The regression output shows the same relationship between foreign exchange
rate and gold prices for the selected time period data.

With respect to stock market prices,
gold prices are inversely related. Gold is a form of investment which is
considered safer investment. On the other hand, investment in stock market
involves risk. Stock market goes up when investors are optimistic about the
economy and the capital markets. They tend to buy more stocks, pushing prices
up while, taking more risk for better future return. In such times, gold prices
go down because more investors are investing in riskier investment i.e. stocks.
Nonetheless, when stock market goes down the investment in gold increases
because investors are looking for safer investment with store of value while
bearing lower risk. The historical data selected for this paper shows the same
relationship between KSE-100 index prices and gold prices.

Moreover, rising incomes is directly
linked to gold prices. In Pakistan and other countries in South Asia where
investment in gold is not merely a safe investment but also a representative of
status in the society and an important aspect of weddings. As income increase,
people are attracted towards buying more gold which in turn pushes the gold
prices up. As evident from the data, the per capita income has been rising in
Pakistan therefore, this has increased gold prices.

Prices vs Interest Rate

To study the impact of inflation
adjustments of gold prices and interest rates I have compared both the
variables in nominal and real terms. Here, interest rates mean policy rate set
by the State Bank of Pakistan during their monetary policy meetings. The graph
below shows the comparison of nominal gold prices and nominal interest rates
for the period starting 1996 till 2015. The graph (Figure 4) does not show any
consistent trend between the nominal values of the both the variables.

Figure 4 Nominal interest rates vs nominal gold prices

the graphical representation of real interest rates and real gold prices show a
negative relationship. Here, real means adjusted for inflation. Gold prices
were adjusted for inflation by dividing it by consumer price index (CPI) and
multiplied by 100. For adjusting the interest rates for inflation, percentage
change in CPI was taken as inflation rate which was then reduced from the
nominal interest rates. The graph (Figure 5) shows that, keeping other things
constant, when interest rates increased, the gold price declined and vice


Figure 5 Real interest rate vs real gold prices

Unlike cash, bonds, equities and real
estate, gold does not offer real rate of return therefore it is a non-earning
asset. Equities and real estate returns are in the form of earnings and rent
whereas, returns from cash and bonds are in the form of interest. When interest
rates are high, investors invest in financial instruments which offer high
returns in line with high interest rates prevailing in the economy. Therefore,
the demand for gold declines leading to decrease in prices. On the contrary,
when interest rates fall, return on financial instruments also decline which
keeps investors from investing in them. This turns investors to invest in gold,
which is a store-value commodity, which increases the demand thus, the prices
also rise. In other words, the opportunity cost is low for the investors who
have invested in gold during low interest rates. Whereas, the opportunity cost
is high for the investors who have invested in gold during high interest rates,
as returns on cash, bonds, equities and real estate are higher.


The study of gold price determinants
showed that stock market prices, exchange rate of US Dollar with Pakistani
Rupee and per capita income impact the gold prices, as shown through the model
discussed in this paper. The model has been able to explain the 97.8% of the
variation in the gold prices over the period from 1996 till 2015. KSE-100
prices and exchange rate of US Dollar to Pakistani Rupee showed negative
relation whereas, gold prices rose as per capita income increased.

Furthermore, the paper studied the relationship
between real interest rates (inflations adjusted rates) and real gold prices
(inflation adjusted prices). Real interest rates showed negative relation to
the real gold prices. Negative relation is explained through the investors
inclination to invest for higher returns on cash, bonds, equities and real
estate when interest rates are high. On the contrary, investors are not
attracted to earnings assets during low interest rates thus prefer gold
investment as it is a store of value commodity. Gold’s store of value nature
has made it weather the impact of adverse crisis in past.