Deutsche Bank and Gold

Founded in 1870. One of the major drivers of the Collateralized Debt Obligation Market prior the Great Recession. The 17th largest bank in the world by total assets. German investment bank headquartered in Frankfurt, around which there is plenty of controversies and allegations of improper behavior. Deutsche Bank. Let’s analyze its link with gold – and whether its collapse is coming, which some analyst are afraid of.

Deutsche Bank Collapse and Gold

How possible is the collapse of the Deutsche Bank ? It’s a difficult question, since bank’s activity is quite opaque and obscure. But something definitely stinks here. Let’s look at the chart below.

Chart 1: The quote of Deutsche Bank’s shares listed on Deutsche Bourse from 2008 to 2018.

The quote of Deutsche Bank’s shares listed on Deutsche Bourse from 2008 to 2018

As you can see, the shares of Deutsche Bank are below levels recorded during the Lehman Brothers’ debacle. They are down about 90 percent from the all-time high in 2007. And the bank’s price to book value is only 0.29, which is not a sign of health. Indeed, the bank lacks clear strategy and vision of how to deal with the chronic revenue weakness in key business lines. In short, its business model no longer makes sense.

Regulatory requirements and ultra-low interest rates hit Deutsche Bank’s ability to make money. It has less capital than its competitors. The bank also faces many ( indeed many: more than 7,000) legal issues (selling toxic mortgage securities, sanction violations, money-laundering, etc.), which requires high litigation reserves. For example, in 2014, Deutsche Bank settled gold price fixing litigation (it was accused of conspiring with several other banks to manipulate prices of gold and silver, rigging the so-called London Gold Fix and Silver Fix at the expense of traders and their clients).

Hence, Deutsche Bank is a good candidate for the next Lehman Brothers. Its fundamentals look pretty ugly, while its massive derivative book could explode any day. According to the IMF, the bank is the largest contributor to systemic risks among the largest lenders globally, so its collapse could push the world into financial crisis, making gold to shine (as a global safe haven).

On the other hand, the problems of Deutsche Bank are widely recognized, while really dangerous imbalances go unnoticed. Investors should also remember that problems of European banks, which have not really been solved yet, would support the U.S. dollar against the euro, reducing the gold’s gains. The important question is also whether the German government would allow Deutsche Bank’s bankruptcy.