Gold - The Counterparty Risk Free Investment
As bullion dealers, we are asked on a daily basis whether we think the fiat dollar price of gold and silver are going to go up or down. However, for many, if not most, bullion investors, the most important aspect of precious metals is that there is no “counterparty risk”. What this means is that the value of the asset class is not reliant on any company, government, bank or any other institution, to guarantee the gold or silver.
Bank accounts are very convenient, but they do equate to digital numbers on a system somewhere. In 2013, the bank depositors of Cyprus woke to find balances of over €100k were converted into bank shares and daily cash withdrawals were capped at €300. Last month we saw bank runs in China with tanks outside bank branches as lines of depositors (unsecured creditors) sought to get whatever they could out of the bank as the Evergrande contagion continued to spread.
In the midst of the ‘trucker’s convoy’ in Canada earlier this year, not only were protestors subject to bank account freezes, but also individuals that donated to the cause through crowdfunding website such as gofundme.com.
Cryptocurrency exchanges and Defi platforms such as Celsius have gone under as funds contributed by more unsuspecting members of the public have been swallowed up by proprietary traders and speculators within the institution. When Celsius went into Chapter 11 bankruptcy, they used depositors' funds to pay senior creditors such as FTX, with the last people to get paid out being the retail investors that had trusted Alex Mashinsky with their crypto wealth. Celsius advertised to the public telling them that they could ‘unbank yourself’; ironically that’s exactly what they did to their customers when they froze withdrawals. We encourage our crypto customers to get our hardcopy Ainslie Crypto Wallets where the secret key is completely protected and can’t be hacked.
Celsius promised to ‘unbank’ its customers. Unfortunately, they made good on the offer.
Even physical cash can go the way of the dodo. In 2016, India scrapped its two largest denominated notes, worth 500 and 1,000 rupees a piece. Indians who had saved cash for a rainy day were told that as of midnight that night, those notes would be invalid and needed to be taken to a bank or post office within 50 days. The shock move led to lines all over the country with an estimated 16.6 billion 500 rupee notes and 6.7 billion 1000 rupee notes in circulation at the time.
Starbucks has announced that they are no longer accepting cash from 1 October in the latest covert attempt to squeeze cash out of the economy.
With gold and silver, held physically, there is:
- no bank that can unilaterally announce that anyone with more than 20oz of gold, that the surplus gold will be converted into bank shares or limit your access to the metal with a ‘daily cap’
- no lending institution that can use your gold to speculate on markets and then freeze your account when the market crashes
- no government that can unilaterally announce that 2oz bars or 100g bars will no longer be valid
When you hold gold and silver, and crypto where the private/secret keys are accessible to you and you only, then you are not on someone else’s balance sheet. You are neither borrowing, nor lending. There is no debit or credit outstanding. Precious metals are outside of the currency or paper system, and rely on no one else. If you have 10oz of gold, that’s 10 troy ounces regardless of whatever the relative devaluation of the Australian dollar, Euro or US dollar happens to be on that day.
Gold and silver are not valuable because a government, bank or company prints a certificate or a note to say so. Precious metals are valuable on account of their unique physical properties and fundamentally on their rarity. As the US just printed nearly 40% of all the money ever printed last year, gold supply increases at barely 2% every year and getting harder. Bitcoin will only ever have 21m of supply and getting harder to produce every year. Through thousands of years of history, peoples from all across the globe have arrived on gold and silver as a fundamental store of value.
Banks, governments, nation states, civilisations and even cultures come and go, but gold and silver always retain their value.