I mentioned back in the July of this summer that Deutsche Bank were leveraged to the hills. And that Angela Merkel was not going to bail out the Italian banks. The situation has seen no improvement since. In fact, it has deteriorated further with Deutsche Bank’s share price falling 6%.
Deutsche Bank are facing a fine of something to the tune of $14 billion. Germany’s largest bank, which has an eye watering derivative exposure of 55 trillion-euro, is hoping to reach a settlement with the U.S. Justice Department, for mis-selling mortgage backed securities (bet they’re not alone) in the run up to the 2008 crisis. They are hoping to renegotiate a more palatable sum of $5.4 billion after this month’s U.S. presidential election. If Angela Merkel allows Deutsche Bank to fail, the domino effect could begin with the Italian banks falling, swiftly followed by the French and Spanish.
A reduced fine would go a long way to quell the jitters in the market. After all we can’t have the Euro’s poster boy Bank having a Lehman moment on top of Brexit. Or can we? All this toxic debt will eventually roll up on someone’s shore at some point, and when it does, things will begin to unravel. All commodities need a narrative and this bodes well for gold (the crisis commodity), as it inspires confidence, which in turn raises the price.
Gold has had a strong 2016, going from £700/oz to over £1000/oz due to all the political and economic turmoil. It eventually paused for breath in August and we are currently still hovering just over a £1000 an ounce. For Sterling buyers, gold has performed well over the long term too. In fact, in the last 10 years it has risen 222% going from £317/oz to £1,023/oz. That is a whopping annual increase of over 13%. Compare that to your ISA.
This narrative looks set to continue with the media talking up a ‘Hard Brexit’. So where is gold heading? From here, it may well go down, as it has not done what it historically does (rise) when the dollar falls. This would suggest gold is currently out of sync. However, from a long haul investment point of view, gold is still a good bet. And this is where a little Contrarian Investing is required. You have to fight the fear of selling out to fads and media spin. Ignore the herd mentality when the value goes sideways or does not move for a month, or even when it loses value. All commodities go up and down. You must overide the natural urge to sell, that is how they manipulate you in and out of a position. Remember, the crowd is usually on the wrong side of the market when it comes to investing. So as long as you are comfortable with your allocation (don’t back the truck up) in your folio, hold fast.
Finally, it is always worth reminding ourselves that Gold is CGT (Capital gains tax) free, and a great way to pass on wealth to your children. I shall leave you with an old Dutch proverb:
An ounce of patience is worth a pound of brains.
If this has been of any interest or help please share. And as usual your comments are always welcome!