Counterparty risk is one thing you don’t need to worry about when investing in precious metals. Unlike other investments, such as stocks and bonds, they are not subject to the risk of default. Banks fail. Companies go bankrupt. Governments are overthrown. In all these situations, investors lose money due to counterparty failure. To avoid circumstances like these, investors choose precious metals as a store of value and hedge against economic uncertainty.
Counterparty Risk Explained
Counterparty risk refers to the chance that one party in a financial transaction will not fulfill their commitments, leading to a loss for the investor. For example, suppose you buy a bond issued by a corporation. In that case, you are susceptible to the risk that the company will default on its debt and be unable to repay you. In contrast, owning physical precious metals means you are not dependent on any other party to perform since you maintain direct control over the asset.
Physical Ownership Is Key
The ability to physically safeguard your precious metals is vital in times of political or economic turmoil. During these periods, financial institutions may be vulnerable to seizure or withdrawal restrictions. The bank runs that occurred in the 1930s when the stock market crashed perfectly exemplify this risk. Investors were stuck, unable to withdraw their funds from banks. In that decade, 9,000 banks failed, losing a total of 7 billion dollars of investors’ assets.
Physical precious metals differ from other investments because they are tangible materials with a determined value in the market. Highly liquid and exchanged globally, you can sell precious metals anywhere in the world. They are in demand regardless of local currency or economic conditions. This ability to take physical possession of your investment and free yourself from counterparty risk makes precious metals the ultimate secure investment.
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