The European banking sector is having a rough year.
With Deutsche Bank facing a $14 billion fine from the US Department of Justice, things just got worse.
Shares of Deutsch 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.
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.
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:
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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