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.

Money Metals Exchange and its staff do not act as personal investment advisors for any specific individual. Nor do we advocate the purchase or sale of any regulated security listed on any exchange for any specific individual. Readers and customers should be aware that, although our track record is excellent, investment markets have inherent risks and there can be no guarantee of future profits. Likewise, our past performance does not assure the same future. You are responsible for your investment decisions, and they should be made in consultation with your own advisors. By purchasing through Money Metals, you understand our company not responsible for any losses caused by your investment decisions, nor do we have any claim to any market gains you may enjoy. This Website is provided “as is,” and Money Metals disclaims all warranties (express or implied) and any and all responsibility or liability for the accuracy, legality, reliability, or availability of any content on the Website.

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