When you invest in precious metals like gold and silver, there isn’t any counterparty risk. When you do some searching for different investment options, you’ll find investments like government bonds as a “risk free” asset. There isn’t any risk involved since you have a guarantee that you’ll get your money back assuming the government doesn’t dissolve and has solvency. It’s not common that a government will simply vanish into thin air and default on their debt, so you can feel very secure investing in government bonds.
It’s not to say that there is zero chance this could happen, so it’s not a guarantee, but it’s almost a sure thing, like a 99.99% chance in a country like the United States. Of course, strange things do happen but frankly I don’t ever see that happening as long as I’m alive.
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What Will I Learn?
What is a Counterparty Risk?
A counterparty risk is one in which whomever is on the other side of the transaction may have issues fulfilling their side of the obligation.
Let’s keep the government bond example going for a second. When you purchase bonds, you do so with the assumption that the government will indeed return the money you invested with interest when the bond’s term expires. Now, a government COULD be overthrown, have too much debt on it’s books, and not be able to repay the bondholders. That right there is an example of counterparty risk.
The majority of investments do have a level of counterparty risk. When a stock is issued by a company, the company could very well go towards bankruptcy, creating counteryparty risk. When you hold a government-issued fiat currency, there is counterparty risk as well. Some recent examples of this include old banknotes from Zimbabwe.
How Do You Minimize Counterparty Risk?
Investing in physical gold and silver eliminates counterparty risk entirely.
Counterparty Risk Does Not Exist With Gold and Silver
When you own precious metals like gold and silver, there won’t be another party involved, meaning that without counterparty, there is zero counterparty risk. Buying precious metals in any form means you don’t have to depend on anyone else to offer value in return. There is not a single thing behind silver or gold that can make the value go to zero and they are highly liquid in any market.
You can hold these items in your hand and sell them anywhere in the world. They have global value and are traded everywhere. While it’s possible the price of gold and silver could drop while you hold these asses, they have use cases and value making them impossible to go to zero at any time. They can’t miss payments, go bankrupt, or get involved in some fraud that would ruin their value, making them an investment you can hold without having sleepless nights.
This ONLY goes with having physical metals. ETF’s do not have the same luxury as you have to go with the generalization that whomever issued the ETF has the actual metals to back up the paper you purchased. This creates counterparty risk.
For this reason, we’re huge advocates of precious metals. Our own VP Tim Schmidt recently added to his gold IRA, and you can read a full review of the company he chose on this page.
If you ever want a self serve platform to buy and sell precious metals online outside of your IRA or 401k, check out Legacy Precious Metals. They have the best platform I’ve found to accomplish this task without talking to anyone!
Read the full Legacy Precious Metals review for more information and minimize counterparty risk in your investment portfolio by taking action today.