What is a counterparty risk?
Jump to section:
Counterparty risk is a risk within a contract where the counterparty doesn’t live up to its contractual obligations. Potentially counterparty risk is a type of risk which could be open to both parties and is one which needs to be carefully considered when entering a contract.
Counterparty risk is an everyday risk
We experience counterparty risk every day. Examples are buying shopping at a supermarket, leasing a car, paying for gas and electricity. We live in a contractual world, but do both parties always live up to their obligations?
The risk in investment terms
For any type of paper-based investment, where no direct assets are involved, e.g. shares, bonds, traded funds, etc. there is always a degree of counterparty risk. Here is a list of just a few of the risks associated with the company or fund you may indirectly be dealing with:
- Credit status – the credit status of the company / fund can create issues with ability to trade
- Employee fraud – (e.g. embezzlement), particularly at Director level
- Liquidity – whilst trading profitability a business may be illiquid, causing a lack of confidence with their bankers
- Market changes – a sudden change in the market (e.g. oil price) could dramatically affect the value of an investment
- Mergers and acquisitions – a significant organisational change could introduce new risk exposure
- Overexposure to a bank – funds in a bank which collapses is a major financial risk
We hope you enjoy our YouTube video – “Buying gold bars – a guide for investors”
A cautionary word about gold ETFs
Don’t be fooled into thinking that gold ETFs (exchange traded funds) are free of counterparty risk,
they are not as they are a commodity, a financial instrument. Always think of gold bullion and coins investment as entirely different from gold ETF investment. Investing in gold that you can “touch and feel” is investing in a real and tangible asset, whereas ETFs are paper gold only
Many investors think that an ETF is the same as owning physical gold, in that the funds gold is inventoried and recorded in accounts and in member areas of websites. This is true, but there are numerous risks associated with this type of investment and in recent years there has been a frequent number of increasingly severe cases of collapse and mismanagement of ETF funds. This article from Business Insider provides a useful insight.
Physical gold and silver have no counterparty risk
Precious metals like gold and silver have been traded for millennia and can be relied upon as a safe form of investment of wealth. Unlike some forms of investments, they are not country-specific, gold and silver can be traded everywhere across the world.
Gold and silver are real, tangible assets, which can be touched and have a known market price. Precious metals cannot default on payments or go bankrupt, don’t need boards of directors and are not subject to many manipulations that other investments can be.
Here at Physical Gold, we would always recommend a balanced portfolio of investments to spread risks. If you don’t own any gold or silver, why not buy some and reduce your counterparty risk?
Buy Physical Gold directly from us
So why not contact Physical Gold to buy real assets like gold and silver, which have no counterparty risk. We can deliver the gold and silver to you very quickly and provide an entirely smooth transaction. Contact us on 020 7060 9992 or email us through our contact form to begin discussions.
Image Credit: Survival Blog