BREAKING THE RULE OF ELASTICITY: INELASTIC GOLD DEMAND IN LOW-INCOME AND EMERGING ECONOMIES. EVIDENCE FROM THE WESTERN BALKANS

Abstract

The present study investigates the persistent inelasticity of gold demand in financially constrained economies, focusing on the Western Balkans as an empirical case. The classical demand theory posits the premise that luxury goods should demonstrate relatively high elasticities with respect to both income and price. Contrary to the predictions made by theoretical models, the findings of this study indicate that demand for gold in the region remains significantly inelastic, a phenomenon that extends to lower-income countries as well, where gold constitutes a substantial component of household balance sheets. Utilising a panel dataset for Western Balkan economies over the period 2015–2024, a log-linear dynamic panel model of physical gold consumption was estimated. This model incorporates international gold prices, real income per capita, and proxies capturing cultural and behavioural determinants. The econometric strategy is predicated on the utilisation of fixed-effects estimation, complemented by the execution of robustness checks employing random-effects models, instrumental-variable techniques, and generalised method of moments (GMM) estimators. The results demonstrate that the price elasticity of gold demand is approximately −0.21 and the income elasticity is around 0.06. This confirms that gold consumption is only minimally sensitive to changes in price or income levels. Furthermore, both cultural perception indices and a behavioural factor index, constructed from survey responses and synthetic behavioural data, exert a statistically and economically significant positive effect on gold demand. These findings suggest that gold operates as a safe-haven asset, a store of value and a culturally significant symbolic good within the Western Balkans. The study makes a valuable contribution to literature on commodity demand, behavioural economics and household portfolio choice, as it shows that conventional elasticity predictions are inaccurate in situations where cultural norms, financial exclusion and heightened risk perceptions take precedence over purely price-based decision-making.