How Physical Gold is the Only Asset without Counterparty Risk Author: Tom Chen Last Updated: 20 January 2021 Many people these days will tell you that the modern economy is mostly intangible and quite often even invisible. After all, the early concept of credit money, printing money, and, of course, the recent rise of digital assets – have contributed to the core of the discussions of the intangible economy. Shares of a company, for example, represent ownership in a legal entity that will not have real value in many scenarios. Theoretically, a national currency can lose its value to zero when people lose trust in their government. And even oil can lose much or all of its value when clean energy becomes a reality. The risk associated with any investment is also a factor of the counterparty risk, which can simply be described as the likelihood that one of those involved in a financial contract might not be able to meet its obligations. In simple terms, the counterparty risk is the risk of potential expected losses that might arise for the investor from the other side of the transaction, which could be the broker, another investor, and even the government. But there’s one asset that is considered almost completely safe when being purchased in the right way – Gold. Historically, gold has been used for centuries as a primary currency, a store of value, a medium of exchange, and for other purposes such as jewelry, decoration, and medical properties. These days, there are many forms in which an investor can buy gold, however, the only way that an investor can really buy gold and at the same time avoid the counterparty risk is by buying gold physically. Physical Gold – An Asset without Counterparty Risk The key reason why owning physical gold is considered by many as the best hedging strategy against inflation and any financial instability is the fact that it is an asset without counterparty risk. There’s no second party to the transaction and the owner can sell its gold bullions anywhere and anytime. The most similar assets in that sense to a precious metal like gold are agriculture commodities like wheat, corn, and soybean. However, unlike gold, the majority of agricultural commodities often have an expiration date. This leads to the conclusion that physical gold is still the most desired asset in the world without counterparty risk. This does not mean that gold is a risk-free investment (as the price of gold can always decrease in value) but it does mean that as long as gold remains an international currency and a medium of exchange, it will have value. Should You Buy Physical Gold? Throughout history, gold has always been an unparalleled store of value. And, despite the fact that many countries may have abandoned the gold standard a long time ago, these countries still hold significant gold reserves. Central banks, much like individual investors, hold gold reserves as insurance against inflation or other economic crisis. Moreover, as some countries like Russia and China are motivated to shift away from using the US dollar as the reserve world currency, it is very likely that the demand for physical gold will remain robust. When it comes to the question of whether you should buy physical gold – Like anything else in the investing world, there are pros and cons to buying physical gold. As such, while buying gold through a derivatives exchange or in the form of CFDs will allow the investor to avoid storage costs, and use leverage trading, at the same time, buying gold physically means that the investor can purchase this precious metal with no counterparty risk. This is because gold is a tangible asset that can be traded everywhere and anytime across the world. And, as a tangible asset, gold will presumably always have some sort of value. Things to Consider Before You Buy Physical Gold Although there’s a way to actually buy gold and store the bullion anywhere the client wants, some of the brokerage firms that offer users to physically purchase gold often allow them to store their gold bullions in segregated vaults. This service enables investors to buy physical gold online. But you should make sure that you buy gold bullions with a firm that is licensed and authorized to sell and store physical gold on behalf of their clients. In addition, it is important to check the storage cost, the commission the broker charges whenever you want to resell your stored gold, the quality of the gold products (purity), and the number of kilograms the broker enables you to store on their secured vaults.