Buy Gold and Silver to Hedge Against Counterparty Risk

By Mike Maharrey, Money Metals Exchange
 

Owning silver and gold is a good way to hedge against counterparty risk.

What exactly is counterparty risk?

In simple terms, it is the possibility that the party on the other side of a transaction might not fulfill its obligation.

For instance, if I loan you $200, there is always a chance that you won’t pay me back. That possibility represents the counterparty risk that I’m taking on.

Most transactions and investments involve some level of counterparty risk. If I invest in a stock, there is the possibility the company will go belly-up. If I buy a government bond, there is a chance that the issuing country could be overthrown. If I rent out my house, the tenant might stop paying.

And while you might not realize it, putting money in the bank comes with counterparty risk. The bank could freeze my account for any number of reasons, making it impossible for me to withdraw cash. This is why we have the FDIC. Of course, there is counterparty risk there as well. Nothing guarantees that this quasi-government entity will make you whole.

Even stuffing dollars under my mattress exposes me to counterparty risk. After all, there is another entity issuing the dollar – the Federal Reserve. If it creates too many dollars, the value will fall, and I will be victimized by price inflation.

Physical silver and gold impose no counterparty risk. If you own physical metal and store it in a safe at home, there isn’t another party involved. Nobody can default on gold or silver. Its value will never go to zero. Gold and silver remain liquid under virtually any market conditions. Gold and silver would likely increase in value if there was a significant economic collapse because they are real money.

That’s not to say owning gold and silver comes with no risk. But that risk is not based on the reliability of any other party.

It’s also important to remember that while physical gold and silver held in your hands creates virtually no counterparty risk, gold and silver ETFs and other “paper gold” products do. A fund traded on the market claiming to hold physical metal may or may not have it on hand.

You also take on counterparty risk when you store your gold and silver in a third-party facility. You could lose your metal through theft, fraud, or an act of God. Of course, you could lose silver and gold stored in your home the same ways (except fraud), so you have to weigh the risk of using third-party storage and keeping large amounts of silver and gold at home.

If you opt for third-party vaulting, it is important to choose a trusted company.
 

Money Metals offers secure precious metals storage in its own state-of-the-art facility. Here are just a few advantages of storing with Money Metals.

• Money Metals Depository contents are fully insured by Lloyd’s of London.
   

• Metals stored in your account are segregated and never commingled or rehypothecated — and cannot be used as collateral for a loan by anyone but you.
   

• Depository holdings are totally independent and removed from any bank, Wall Street, and Washington, D.C.

  Mike Maharrey is a journalist and market analyst for MoneyMetals.com with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.