1. Chapter 4 Appendix 2 Applying the Asset Market Approach to a Commodity Market: The Case of Gold

2. Copyright ©2015 Pearson Education, Inc. All rights reserved.4-1 Supply and Demand in Gold Market Deriving Demand Curve ─ P e t+1 is held constant ─ P t , g e , R e   G d  ─ Demand curve is downward sloping Deriving Supply Curve ─ P t , more production, G s  ─ Supply curve is upward sloping

3. Copyright ©2015 Pearson Education, Inc. All rights reserved.4-2 Supply and Demand in Gold Market Market Equilibrium 1. G d = G s 2. If P t > P* = P 1, G s > G d, P t  to P* 3. If P t < P* = P 1, G s < G d, P t  to P*

4. Copyright ©2015 Pearson Education, Inc. All rights reserved.4-3 Changes in Equilibrium Factors That Shift Demand Curve for Gold 1.Wealth 2.Expected return on gold relative to alternative assets 3.Riskiness of gold relative to alternative assets 4.Liquidity of gold relative to alternative assets Factors That Shift Supply Curve for Gold 1.Technology of mining 2.Government sales of gold

5. Copyright ©2015 Pearson Education, Inc. All rights reserved.4-4 Case: Change in Price of Gold From a Rise in Expected Inflation If exp. Infl. ( e )  1. e , P e t+1 ; at given P t, g e   G d   G d shifts right 2.Go to point 2; P t  3.Price of gold positively related to  e 4.Gold price is barometer of - pressure Figure 1 A Change in the Equilibrium Price of Gold

6. Copyright ©2015 Pearson Education, Inc. All rights reserved.4-5 Example Factors That Shift Demand Curve for Gold 1.Wealth 2.Expected return on gold relative to alternative assets 3.Riskiness of gold relative to alternative assets 4.Liquidity of gold relative to alternative assets Factors That Shift Supply Curve for Gold 1.Technology of mining 2.Government sales of gold