Germany’s biggest lender reported an unexpected quarterly profit October 27. Despite the seemingly upbeat news, meaningful concerns loom large over the troubled bank as it continues to negotiate a multi-billion dollar fine with the U.S. Justice Department.
While this may seem very distant and far away, it could have direct ramifications for your portfolio in the weeks ahead.
Since hitting a peak in July 2015, Deutsche Bank shares have fallen more than 65 percent as confidence in the bank continues to crumble. Germany is traditionally home to stable economic policies and strong banks, which adds fuel to the current wave of financial system concerns.
The German lending powerhouse is mired in tense negotiations with U.S. Justice Department officials. The U.S. government has proposed a massive $14 billion fine in relation to Deutsche Bank’s mis-handling of mortgage backed securities during the 2008 global financial crisis.
The German bank reportedly has stated that it doesn’t intend to pay “anywhere near” that amount.
The negotiations have put stress on U.S.-German relations with some calling it a new “economic war.” The Washington Times reported that “the huge Justice Department fine is in fact retaliation by the Obama administration for the EU’s ruling in August that U.S. computer giant Apple must pay some $13 billion in back taxes over its operations in Ireland.”
A Mini Run on the Bank
A broad of array of questions continue to swirl around whether the German bank has enough available cash to meet its obligations. This has triggered a mini type of “run on the bank” as clients pull their deposits from Deutsche bank.
Clients have reportedly withdrawn billions of euros amid questions whether the bank has adequate capital to cover potential losses and meet regulatory requirements.
In this type of environment, gold tends to shine as a safe haven and a vehicle for wealth preservation for investors. Gold is a time-honored investment that investors turn to in times of market distress, bank uncertainty or potential financial system crisis.
The Deutsche Bank story is still unraveling and is far from complete. There are concerns that a $14 billion fine could cripple the bank. The International Monetary Fund said in June that the bank “appears to be the most important net contributor to systemic risks in the global banking system.” Rising risks about bank liquidity and financial system integrity only increase the attractiveness to gold and other precious metals.
Is Deutsche Bank The Next Lehman Brothers?
This brings back memories of 2008, the potential for a domino impact and a larger bank crisis. Deutsche Bank is a global bank with a deep reach into other financial institutions.
Could this become another instance of Too Big To Fail? German Chancellor Angela Merkel has not ruled out a government bailout of Deutsche Bank, but she hasn’t signaled her support for one either. This leaves many questions unanswered for investors.
Spillover from Deutsche Bank to globally systemically important banks
Europe’s banking crisis is back. The integrity of Germany’s largest bank is at stake. The euro currency has been moving in tandem with Deutsche Bank shares in recent weeks. If the Deutsche Bank debacle turns into a domino effect the impact on the euro will be significant and it could trade significantly lower.
Deutsche Bank poses a major risk to U.S. stocks as well and equities could tumble if concerns about the banking system escalate. If this were to unfold, gold would likely surge as risk-averse investors pile into the safety of gold.
Consider now how well your portfolio is diversified? Are you hedged against the many risks that are rampant in today’s uncertain economic environment? Gold provides stability, wealth preservation and the opportunity for price appreciation and last but not least is an important component to effective portfolio diversification.
Gold has slipped off its 2016 highs, which presents a better value and buying opportunity for long-term investors. Global buyers of gold are already using the current price dip as a buying opportunity. Will you? Call us now and our portfolio managers can help.