Owning silver, gold, and various other physical precious metals and assets are 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 $1000, 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. If I buy cryptocurrency and even secure my assets by storing them in a cold wallet, I am at the mercy of the developers of the project to not completely devalue the digital tokens that I hold.
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. Such products and similarly stocks traded on the stock market carry significant counterparty risk as you have little to any control on the fund and how it performs and operates.
There is a similar degree of counterparty risk when you store your gold and silver in a third-party storage facility offered by many big bullion stores and other third-party's as these entities are often less well-established than large banks and can dissolve at anytime. They also do not have as reliable secondary insurance as, say, an FDIC-insured bank account or safety deposit box.
Be sure to always consider counterparty risk when investing your hard-earned money!
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