The Euro Banking System is having a rough year. By John Grandits, Hard Assets Alliance
With Deutsche Bank AG (NYSE:DB) facing a $14 billion fine Gold Is the Answer for European Investors Battered by the Banking System
from the US Department of Justice, things just got worse.
The LF Brook Absolute Return Fund lost -2.52% in the second quarter of 2021, compared to a positive performance of 7.59% for its benchmark, the MSCI Daily TR Net World Index. Year-to-date the fund has returned 4.6% compared to 11.9% for its benchmark. Q2 2021 hedge fund letters, conferences and more According to a copy Read More
Shares of Deutsche Bank have lost more than 60% over the past year. Barclays, Credit Suisse, Commerzbank, and Royal Bank of Scotland are all down at least 40% since September 2015.
Several years of weak growth, low interest rates, and more and more non-performing loans have gutted European bank profitability.
Overall the sector, represented by the EURO Stoxx Bank index, has lost more than a third of its value over the past 12 months.
Euro Banking System – Out of the frying pan into the fire
To drive economic growth and hold off deflation, the Bank of England recently cut the benchmark interest rate to a 322-year low of .25%.
It also increased bond buying, or quantitative easing, by $80 billion to try and drive down market interest rates like mortgages and corporate debt.
This forced most major European banks to lower already dismal deposit rates.
As a result, many are jumping ship. But there’s a downside: pouring money into alternative investments has created excessive valuations in sectors like utilities and real estate.
Making matters worse, the British pound, which has been weakening over the past year, recently fell to a 31-year low.
The UK’s vote to leave the EU accelerated this decline. The Euro and USD have strengthened 10%–15% vs. the pound since the Brexit vote in June.
Euro Banking System – A promising alternative
What’s an investor to do?
Buy already inflated dividend stocks or REITS? Lower-rated debt with a higher yield? Maybe an account where you can hold cash in another currency? None are a good solution.
However, there is a tax-free alternative for residents of the UK.
It has proven to preserve wealth and is uncorrelated to most traditional investments. Better yet, depending on where you buy it, it can also offer currency diversification.
This alternative investment is gold. Here’s how investors can benefit:
- Gold and silver Great Britain Britannia coins are legal currency in Great Britain, and as such are exempt from capital gains tax. UK citizens can make unlimited tax-free profits.
- UK investors can avoid paying the 20% value-added tax on silver when it’s purchased for storage outside of the European Union, in Switzerland for example.
- Diversifying into a US dollar-based account offers added security to investors whose home currency is under pressure. Gold can yield gains and help avoid negative currency movements.
- Gold carries none of the risk of higher yielding investments and can produce a faster (and much larger) return than a money market account.
Euro Banking System – The gold bull market that nobody’s talking about
Despite being in a bear market for most of the past three years, gold (which is quoted in US dollars) has actually risen when denominated in most other currencies.
The message is pretty clear. An allocation to physical precious metals could be one of the best moves European investors can make to protect themselves from bank crises such as the one we’re seeing with Deutsche Bank.
It’s only a matter of time before gold joins every other foreign currency in the world and marches substantially higher.
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