Monday, May 9, 2011

Gold and Silver and Counter Party Risk


Gold
in New Zealand dollars: $1888.00 per oz
Previous all time high: $1955.10 per oz

Silver in New Zealand dollars: $45.26 per oz
Previous all time high: $48.58
per oz

You often here that gold has no 'counter party risk. What is this?
The risk to each party of a contract that the counterparty will not live up to its contractual obligations. Counterparty risk as a risk to both parties and should be considered when evaluating a contract. - Investopedia

When I work, I expect to be paid with something that I can exchange for the time that work took. I get paid in NZ dollars. Time is money in foldable form.

Unfortunately, this money is a paper debt instrument. In other words, it has counter party risk attached to it. If someone down the line defaults on the other side of my debt instrument, it could actually disappear. Again, an example from Investopedia:

"If Joe agrees to lends funds to Mike up to a certain amount, there is an expectation that Joe will provide the cash, and Mike will pay those funds back. There is still the counterparty risk assumed by them both. Mike might default on the loan and not pay Joe back or Joe might stop providing the agreed upon funds."

The world banking system is fraught with counter party risk. When the crisis of 2008 hit, trillions of dollars were being lost from banks by the hour. Confidence that money existed in accounts was being eroded and the system was hours from shutdown. Suddenly counter party risk is in action.

If Ireland or Greece decide they have had enough of being bossed around by the ECB, they might just decide not to pay their debt anymore and default. English and German Banks will suffer, and then, perhaps, the house of cards will fall.

The idea that the money you hold in your hand is actually yours, is false. It is a debt instrument with counter party risk. Have a look at it, it probably says that it is a Central bank Note, or some like description. It used to say 'Gold or Silver certificate.. redeemable in physical gold or silver.

If you own physical gold or silver, and I stress physical and allocated, then you have money with no counter party risk. No one down the line can default on your gold bar and it suddenly disappear.

What's more it always holds it true value and preserves it's wealth.

And for those still concerned about the latest drop in the silver price:
And LO! A Reminder: a seasoned investor NEVER sells his bull market position during a correction. He knows that he can never make as much money trading as he can make WAITING. - Franklin sanders

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The Anglo-Far East Company
The Original Private Bullion Custodian
Your reference: an-001
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