What Is Counterparty Risk and How Can You Minimize It?
One of the reasons to own physical gold is that it doesn’t come with any counterparty risk.
In simplest terms, counterparty risk is the chance that one party in a financial transaction will default on its contractual obligation. My asset is somebody else’s liability. If I loan you money, there is always the possibility that you won’t pay me back. Or consider buying a stock. There is a risk that the company will go bankrupt and the value of that stock will go to zero.
Investments with lower levels of counterparty risk are typically considered “safe.” For instance, most people consider government bonds to be relatively risk-free investments. But there is still some level of counterparty risk. Governments go bankrupt too. Just ask the folks in Detroit.
Even dollars come with counterparty risk. Yes, greenbacks are backed by the “full faith and credit” of the United States government. But that same government is $22 trillion in debt. Consider this: since Ronald Reagan was elected in 1981, the US debt has doubled every 8 years on average. If this trend continues (and it seems to be accelerating), the US debt will be at least $40 trillion in 2028.
On top of the ever-spiraling debt, the US central bank engages in monetary policy that intentionally devalues the dollar.
So, you are exposing yourself to counterparty risk even when you hold cash.
Not to mention the fact that the banking system itself injects counterparty risk into your financial world. Remember the crisis in Greece? Banks shut down and people couldn’t access their money. Or how about the related Cypriot financial crisis? Banks in Cypress were simultaneously overleveraged and overexposed to toxic foreign government debt – primarily Greek. The “fix” was a €10 billion bailout by the ECB and IMF. But it came at a heavy price. The plan required closing down Cyprus’ second-largest bank and imposing a one-time bank “levy” on all uninsured deposits above €100,000. While it was technically called a “levy,” it was nothing more than an outright seizure of funds. The bank’s depositors thought their money was safe and secure. It wasn’t. They literally saw their savings vanish before their eyes in just a matter of days. Stop and think about what happened. The central bank seized depositors’ money with no intention of ever paying it back.
If you buy precious metals, you can hold them in your hand and nobody else has any claim to them. While bank deposits and short-term debt securities may be destroyed by bankruptcies or debt relief, you can’t destroy the value of silver and gold: their market value cannot drop to zero. Once you possess the metal, you don’t have to depend on anybody else to fulfill a contract or keep a promise in order for it to sustain its value.
Now, there is the issue of storage. You can’t eliminate risk completely. Somebody could always come and take your gold from you by force. A SchiffGold precious metals specialist can help you find the solution to minimize this risk as well.
Peter Schiff has recommended holding at least 10% of your portfolio in gold for years. Now some people in the mainstream are starting to echo this advice.
What if more people begin to catch on? If the idea goes mainstream, and all investors go to a 10% gold allocation, the price will skyrocket. Investors need to move quickly to get ahead of the crowd.
Talk to a SchiffGold precious metals specialist today to learn more about counterparty risk and how to minimize it. Call 1-888-GOLD-160.