Are Deutsche Bank and Barclays Taking a Big Risk By Staying in the Precious Metals Markets?


Source: Flickr / Georgio Monteforti.

Barclays (NYSE: BCS  ) and Deutsche Bank (NYSE: DB  ) have announced they're scaling back roles in the commodities markets. But investors shouldn't be too quick to breathe a sigh of relief. These firms plan to continue dealing in precious metals markets, and that decision threatens to keep them in regulators' crosshairs, if not in and out of court.

Deutsche Bank to quit price fixing
Gold and silver prices are set, or fixed, during daily teleconferences held by a select group of banks. Deutsche Bank is currently one of the price-setters for both metals. After failing to sell the post, Deutsche Bank has given its two-week notice and will no longer take part in the price-setting after May 13.

Deutsche Bank has also announced it's closing trading desks for a range of commodities, including energy, agriculture, base metals and dry bulk. Deutsche Bank appears to be making great strides to exit the commodities business, which should settle choppy waters. But, then again, the bank plans to continue trading precious metals.

Barclay's fixing role fixed for now
Currently, when Deutsche Bank quits, only two banks, HSBC and Bank of Nova Scotia, will be left to fix silver prices. Gold prices will be left to Bank of Nova Scotia, Societe Generale, HSBC and Barclays.

Barclays is also trying to reduce its commodities footprint. Earlier this year, the firm announced its withdrawal from energy trading in the U.S. and Europe. Barclays also announced its intentions to exit the majority of its commodity businesses. However, Barclays will also continue dealing in precious metals markets, and expects "business as usual for now" regarding it's role fixing gold prices, reported Reuters.

Criticism, regulatory scrutiny and lawsuits
It's not surprising Deutsche Bank wants out of the price fixing role, nor is it surprising the firm couldn't sell its seat. Any party who bought Deutsche Bank's fixing rights would have paid to be in a hot seat.

Critics of price-fixing cite the lack of transparency in the process. Some say the participating banks can (or do, depending on who you ask) collude to set prices to their advantage. The banks involved in the gold fix, including Deutsche Bank and Barclays, have been slapped with a class action lawsuit for just that.

Regulators' in the U.S., U.K. and Germany are also scrutinizing banks' fixing of metal prices and the potential for abuse in the process. That is only one issue regulators are focusing on with regards to banks' commodities activities. Increasingly, regulations are tightening and authorities are pressuring firms to either get of out of commodities or to make it more comfortable for all involved.

Meanwhile, there's a vocal band of critics who believe gold and silver market rigging extends far beyond price fixing and they're dedicated to raising public awareness and taking action. JP Morgan, for example, has been slapped with silver manipulation lawsuits, allegedly connected with COMEX trading.

Precious metals isn't a playground for bankers
JP Morgan Chase, Morgan Stanley, Deutsche Bank and Barclays have all deemed it time to make major withdrawals from commodities. But, they also all plan to continue playing in the precious metals markets.

Banks consider precious metals units core segments of their business. While this may be true, critics will undoubtedly note banks' determination to stand fast in these markets versus their willingness to exit other commodities. Investors should be prepared, this seemingly ironic attraction to precious metals is prone to be fodder for long-running manipulation allegations. It's likely to keep lawsuits alive and thriving and regulators on the prowl, at least for some time to come.

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