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property market

Global Property Bubble Starting to Deflate

 

Right around the world some of the premier cities for real estate investment are flashing red warning signals that the global property price run up facilitated by central banks dropping interest rates through the floor and printing trillions in extra currency units is approaching its end.

In cities like Melbourne, Sydney, London, Toronto, Beijing and New York sales are falling and prices have started to slip. Given central banks goal of driving economic growth through asset price bubbles, a policy which they doubled down on in the period since 2008 any stall out in either property or equities is a cause for alarm.

 

In Australia, because of the decades long boom in real estate prices, any prediction of an end to the ever rising trend in house prices has typically been laughed off. Australia suffered much less from the 2008 crisis than countries like the UK, USA and Ireland and consequently did not get a much needed house price correction back then either. As a result Australia today is massively exposed to a house price correction on an even larger scale than the current bubbles in US and western european property markets. Australia has now had 11 consecutive months of house price declines and if weakening Chinese activity in Australian real estate is any guide this process is only beginning.

 

In the USA the Federal Reserve has made the market believe that is in complete control of all events and this has driven stock markets to absurd levels. Look at the crazy valuations on loss making companies like Tesla (loses money on every car it sells) and Netflix (loses more money the more content it produces). So fear has gone and greed dominates. This has spread into the real estate and in San Francisco for example, house prices increased by over 200000 US dollars in the first six months of 2018. This means that the average house price in San Francisco is now over 1.6 million dollars compared with the insane bubble high of 2007 when it reached 895k in US dollars before crashing in 2008. Doesn’t take a genius to figure out that this is another even more preposterous bubble than we had in 2008 and the prognosis for prices in San Fran is extremely grim. Because this is the epicentre of the asset price bubble the boom in the stock market and startups since the fed dropped rates to zero and blasted trllions of dollars into the economy has attracted wealthy Chinese and Russian investors by the boatload and free funding has ramped up activity in the high tech and startups sector. But as the Fed tries to raise rates and overseas investment from China in particular starts to fall off San Francisco is walking a tightrope. This particular tightrope is going to look ever more vulnerable as investors and home buyers become more aware of trends in the majority of global real real estate markets.

 

In New York, Manhatten is the most expensive and desirable borough in which to live. Here prices have been falling since the start of the year and this trend shows no sign of reversing. Large amounts of new inventory are coming onto the market in Manhatten just as buyers are getting cold feet. As a result of inventory rising and sales falling by almost 20% in the last 12 months prices have come off over 7.5% in the last 3 months alone. Surprisingly this is happening even while the US economy is supposedly firing on all cylinders.

 

In Beijing, home price sales and prices are starting to stall as the Chinese government has brought in new restrictions on mortgages and introduced buying curbs which has taken a lot of the steam out of the sector and now many developers are offering properties in new developments for sale at asking prices less than those sold in previous phases and less than existing home prices. A huge concern for the Chinese property market is the insane levels of debt that now permeate their economy. Debt to gdp has risen from 141% in 2008 to 256% in 2017. The problem is that Chinese debt levels are high but comparable to developed economies like the USA, UK and Italy. But China is not a developed economy itself and only ranks as a middle income country. This means it has maxed out on debt with a much lower capacity to repay that debt which is likely to strangle growth and economic development in the years ahead. And weakness in China will have huge spillover effects on property prices around the world as Chinese investors spend less on overpriced international real estate. Interestingly the IMF has identified 43 historical instances where the credit to gdp ratio increased by more than 30% in any 5 year period. All but 5 of these resulted in a financial crisis or growth slowdown. Whats makes the odds even worse for China is the fact that debt was already at an elevated level in 2008 and debt to gdp has risen not by 30% since then but by almost twice that amount at 54%.

 

This brings us to London. London real estate transaction volumes have just dropped back below 2007 levels even though house prices have risen by 62% since 2007 in the British capital. However since 2014 a different price trend has emerged and prices in London’s best boroughs are off about 18% since then. Also developers have delivered large volumes of multimillion dollar apartments to the market in the last few years creating a glut of high end properties in a weakening real estate market while there is still a shortage of property at the low end of the market. Reuters found analysts were expecting price declines this year and next due to Brexit and they rated the chance of a real crash at 1 in 3 over the next few years. Linking the dots globally would suggest that market participants are overrating local factors like Brexit and underrating the importance of global trends. Just like all the other markets we’ve looked at London is in a bubble and Brexit might well just be the excuse the market is using to start letting the air out of this particular balloon.  

 

And what about Dublin? Just this week, headlines emerged about flatlining prices in Ireland’s capital. Again, as seems typical, only local factors are considered to explain these trends despite the suspiciously similar trend of flatlining or falling prices seen internationally. In Ireland, the explanation is that central bank curbs on mortgages introduced in the last few years have made houses unaffordable for new buyers as they simply can’t get mortgages large enough to buy at current house price averages. This is a big factor (but not the only one), but the solution is not to relax mortgage lending standards which will further exacerbate the existing house price bubble. Part of the solution is to maintain standards for lending and let house prices come down to better reflect wage levels. The surest indicator of a bubble is when property price growth hugely exceeds wage growth and general inflation and sadly that has been the case (again) in Ireland over the last several years. The only realistic way out of this trap is to let the heat out of the market and let prices start falling again although the current market narrative does not even recognise the possibility that prices might be in a bubble that needs to subside.

Gold and silver markets have suffered as these bubbles have inflated as investors confidence in central banks has soared in the last several years. As investors have focused on stock markets and property markets getting inflated by insane interest rate policies and trillions of euros and dollars these markets have again bubbled up to stratospheric valuations exceeding the highs of 2007 prior to the last crisis. Given the current setup of the international financial system there is no other way for central banks to respond to economic crisis but by blowing more bubbles. For the last few years this policy has looked vindicated. But what happens as these new bubbles start to unwind? There is clear evidence of this happening already in real estate internationally although we do not yet see it in stock markets. What will happen to central banks credibility when the next downturn is even more severe than what was evaded in 2008? And what will happen to gold and silver prices in that scenario?

gold coin vs gold bar

Investing In Gold Bars V’s Gold Coins

Nоw аnd again as it hаѕ bееn рrоvеn оvеr the уеаrѕ, hаvіng аn investment іn аnу gоld іѕ a rіght саll, and gоld bаrѕ аrе no dіffеrеnt. If уоu соllесt gоld соіnѕ, adding bars is a ѕtrаtеgу tо rаіѕе your profits in thе futurе, ѕhоuld уоu mаkе a саll tо ѕеll. But note thіѕ dо уоur research fіrѕt before venturing іntо thе buѕіnеѕѕ оf gold whether you аrе starting оut аѕ a gold іnvеѕtоr, оr whеthеr уоu аrе a ѕеаѕоnеd investor, оur advice аlwауѕ is dо уоur rеѕеаrсh well.

GOLD COINS

Buying gold соіnѕ is оnе оf thе bеѕt and safest wауѕ to іnvеѕt in gоld. Thе older the coin, uѕuаllу thе mоrе numіѕmаtіс value іt wіll buіld, once іt іѕ kерt in excellent соndіtіоn.

Another bеnеfіt оf buуіng gold is its аbіlіtу tо рrеѕеrvе уоur wеаlth frоm іnflаtіоn оr any оthеr есоnоmіс dоwnturn a nation might fасе. Cоіnѕ аnd bаrѕ hаvе іntrіnѕіс vаluе. This mеаnѕ unlіkе a ѕtосk in a соmраnу it will nоt bесоmе worthless оvеrnіght bесаuѕе оf humаn асtіоn. Gold especially соіnѕ are knоwn tо рrеѕеrvе wealth, еvеn when thе organisation that ѕtruсk it ceases tо еxіѕt. Sоmе examples of this аrе thе Roman Emріrе and thе Bуzаntіnе Emріrе (Eаѕtеrn Rоmаn Empire). Gоld dоеѕ not ruѕt оr tаrnіѕh, ѕо once it іѕ nоt dаmаgеd оr scratched іt wіll retain and uѕuаllу buіld more vаluе over tіmе.

One last bеnеfіt оf buуіng gold coins іѕ іtѕ ease to lіԛuіdаtе. Gоld especially соіnѕ аrе one оf thе easiest аѕѕеtѕ tо sell. Most investors that invest іn gоld аrе likely tо buу coins because оf іtѕ аbіlіtу tо accumulate numismatic vаluе оvеr tіmе. Anоthеr reason why gоld is еаѕу to lіԛuіdаtе іѕ соіnѕ аnd bаrѕ usually hаvе a uniform wеіght аnd purity ѕtаtеd оn іt. If an investor is not fаmіlіаr wіth a соіn, thеу саn lооk аt іt аnd know how much gоld аnd what рurіtу they аrе buying. Investing in gold has its benefits; ѕоmе оf thе benefits аrе hard tо fіnd in оthеr іnvеѕtmеntѕ. Thіѕ іѕ whаt makes gold оnе оf thе best іnvеѕtmеntѕ out there.

GOLD BAR

Buying gоld bаrѕ are аn еxсеllеnt wау tо іnvеѕt in gоld. With bars, уоu gеt mоrе gоld fоr уоur mоnеу compared to соіnѕ оf the same ѕіzе. Thе reason for this іѕ whеn you buу coins уоu аrе uѕuаllу рауіng a hіghеr mаrkuр fоr thе manufacture оf thе coin. Bаrѕ are сhеареr to mаnufасturе thаn coins; that іѕ оnе оf the mаіn rеаѕоnѕ why bаrѕ аrе uѕuаllу less еxреnѕіvе thаn соіnѕ. Whеn buying bаrѕ, іt is important to knоw whаt bars аrе рорulаr wіth the іnvеѕtоrѕ іn уоur area. Thе rеаѕоn fоr thіѕ is thе mоrе popular іt іѕ wіth іnvеѕtоrѕ, thе easier іt will bе to lіԛuіdаtе when the tіmе соmеѕ.

Whеn buying gold bаrѕ, іt is essential tо knоw thаt the larger thе bars you buy thе closer tо spot price you ѕhоuld gеt them fоr; соmраrеd tо their wеіght in gоld. It іѕ аlѕо essential to know the larger thе gold bars you buу, thе harder thеу wіll be tо ѕеll. It is recommended thаt іf you dо buу larger thаn one troy оunсе, that you know ѕоmе rіght рlасеѕ thаt уоu саn liquidate thе bаr оr bars when thе time comes.

It іѕ rесоmmеndеd before buуіng gold bаrѕ that уоu rеѕеаrсh and knоw whісh bаrѕ and соmраnіеѕ have the bеѕt rерutаtіоn. This will not оnlу help you tо understand whаt kіnd оf bars tо buу but where some of thе bеѕt рlасеѕ to buy thеm аrе. Onе other thing thаt іѕ recommended whеn іt іѕ possible іѕ tо сhесk thе weight оf еvеrу bаr bеfоrе рurсhаѕіng. Bаrѕ аrе оnе оf thе best and ѕаfеѕt ways tо іnvеѕt in gоld. If you fоllоw ѕоmе оf thе information, уоu rеаd hеrе, investing іn gоld wіll bесоmе аn еvеn safer іnvеѕtmеnt.

Investing in gold bars is сuѕtоmаrіlу a good іnvеѕtmеnt fоr уоur future. Dо уоu аlwауѕ want tо buy gоld bars instead оf gоld coins? Thе ѕhоrt аnѕwеr іѕ gеnеrаllу nо. If thе gоld market еvеr fаllѕ, which hаrdlу hарреnѕ, but іt саn, the соіnѕ will hаvе mоrе wоrth thanks tо thе factors debated аbоvе. Adding both tо your соllесtіоn іѕ a respectable wау to expand your роrtfоlіо and bе ѕurе of a safe fіnаnсіаl future.

Sо ѕhоuld уоu іnvеѕt in gоld соіnѕ оr bаrѕ? Wеll, оnlу уоu саn decide thаt, but rеаllу, іt’ѕ nоt еѕѕеntіаl whаt kіnd of gоld уоu сhооѕе tо іnvеѕt іn – ѕо lоng as уоu do eventually іnvеѕt іn іt.

Bond yields up, gold and silver up and stocks down

Bond yields up, gold and silver up and stocks down

Exciting price moves for silver and gold

Both silver and gold pushed up strongly in the last few days with Thursday the 15th August being notable as silver moved up 70 cents from 16.50 euro to the 17.20 area. This is hugely interesting because the silver price has been anchored down around the 15.00 euro area for most of the summer and just 2 weeks ago it was down to 14.80 as the Fed issued new commentary regarding tapering. In our opinion this is just an opening salvo from stocks bonds and metals as all three asset classes flash red warning lights over the strength of the US economy and its trajectory minus massive bond purchases from the Federal Reserve.

With positive new jobs data yesterday in the US the market hammered stocks and bonds downward as yields on US treasuries continued to rise. All this while gold and particularly silver had one of their best days of the year in terms of price movement. The talking heads on CNBC and Bloomberg attributed the metals strong performance to disturbances in Egypt where they bothered to note it at all. But it is our belief that the metals strong showing yesterday had nothing do with the middle east and everything to do with the market warning the Federal Reserve not to get off the QE tightrope. If the Fed allows the free market to set the proper interest rates for US debt there is a crisis looming that will make the issues in the Eurozone look like a cakewalk!

Strong evidence is emerging that both China and Japan are backing away from US debt in advance of any tapering from the Federal Reserve. The simple truth here is that without the Federal Reserve persevering in its purchases of mortgage backed securities and money printing there will be scant support for US treasuries at current yields. If the Federal Reserve does taper it risks allowing yields to explode and pushing the US government into a Greek style crisis within 6 months. With yields rising and stocks falling while metals rose this is the market sending out yet another early warning to Bernanke – the US economy, housing, stocks and bonds all depend totally on easy money and near zero interest rates. Without the Fed’s MBS purchases over the last year where would the property market be now in the US? And without a stabilisation in housing who would think there was any strength in the American economy?

22 or 24 carat gold bullion

22 or 24 carat gold bullion?

When it comes to purchasing gold coins investors are often split between buying 22k and 24k coins.

Firstly to those who are unfamiliar with the terminology carat simply means simply a level of purity for gold alloys, the purity is measured as 24 times the purity by mass. In lay terms 24 carat is 99.99% gold (none or minimal alloy) and 22 carat is 91.66% (22 parts gold and 2 parts alloy). Understanding this leads to the question why use an alloy? The primary reason is due to gold’s inherent softness, pure gold is extremely soft and malleable, in jewellery or coinage this is often unsuitable. Unsuitable because coins in distribution are susceptible to wear and tear, the alloy toughens the coin and copper is much harder. The alloy(typically copper but sometimes silver) that is added changes the colour of the coin, copper adds a red-ish brown colour(as evidenced in the Krugerrand) and silver being a less dominant colour softens the gold colour(as evidenced in the American eagle).

Many buyers of gold coins believe that they are getting an inferior product when they are buying 22k gold coins, however this is not the case. 22k coins(Kruger, eagle, sovereign) weigh more than their equivalent 24k coins, the alloy is an extra weight difference that the buyer is not paying for. The gold is what the customer is paying for and when dealers present Krugerrands etc, they do call them 1 troy oz coins but this is simply because the alloy is disregarded.

24k coins in mint condition do have an aesthetic appeal that 22k does not have, this is because pure gold has a sparkle and fineness that dissipates when an alloy is added. However 24k coins are a relatively new phenomenon and are not minted to be handled/circulated. An example being the exquisite Aussie Kangaroo it certainly looks more attractive than the 22k equivalent.

However what many customers fail to understand regarding 24k coins is the fact that these coins are soft and scratch easily. The 24k coins often come in cases for good reason as a damaged or scratched 24k coin loses its premium. From experience many older 24k coins have not been maintained properly. On the other hand sovereigns from as early as the 19th century are often in a perfectly saleable condition. Most Krugerrands from the 1970’s again are in good condition and not as susceptible to scratching.

Good advice to buyers when buying gold coins is: only buy 24k if you are prepared to look after them (i.e. keep them encased). For those of you who like to handle your gold coins 22k is perhaps more suitable.