Monthly Archives: May 2016

Only Gold Lowers Risk, Compared To All Other Financial Assets

risk concept in clamp

Gold clamps credit and counterparty risk down to zero!

When reviewing the benefits of owning gold, one of the factors consistently at the forefront is the fact that gold has no counterparty risk. Counterparty risk is the risk incurred by having one or more other entities (counterparties) involved in a party’s transaction, such that they may be unable to fulfil their financial obligations to the party.

In fact, gold is risk-free in terms of credit and counterparty risk. It’s a concept that is thrown around a lot in the gold community, but few actually know what it means. Although it seems obvious once you understand it, the implications are very serious. Let’s first look at counterparty risk as it relates to gold because this is the most simple example, and then we will compare this to other asset classes or forms of financial wealth.

Gold is… well, Gold!

Gold bars

Gold is the only financial asset with no counterparty or credit risk

Gold is a very dense precious metal that has a physical composition that makes it ‘gold’. If you own an ounce of gold, it is yours, just like you own a pencil. Once you own a piece of gold, nobody else has a claim on it. You probably traded something for it, or bought it with cash. But once you own it, that person with whom you traded no longer owns the gold, has control over it, and will likely forget about it.

This of course may seem all too obvious, but the power of this simple observation will become clear as we compare gold to other financial assets.

EVERY Other Financial Asset Class Has A Counterparty

For example, consider corporate bonds. If you purchase a bond from a company, you own that bond and have rights to it. However, that bond is not just recorded on your personal balance sheet as an asset, it is also concurrently on the balance sheet of the company that issued it, and it is recorded as a liability on their books.

A holder of a bond is not just an owner of the bond, but has entered into a contractual agreement with the bond issuer. Counterparty risk is the risk that the entity on the other side of the contract will not fulfill their obligations; in this case, the risk that they will not repay the bond when it is due or make the required interest payments to you, the holder.

What about government bonds, which are considered risk-free? Government bonds are usually considered risk-free because governments have the power to tax their citizens to make their bond payment obligations. Unfortunately, there are limits to this, just ask Puerto Rico.

Governments that control their own money supply are considered to be even safer, because they can just print money to cover any bond repayment shortfalls. Yet this does not remove the counterparty risk. Holders of bonds will be repaid, but Out Of Stockwith devalued currency.

What about money in banks, such as simple checking and savings accounts? Surely there is no counterparty risk here, as the money is there to be withdrawn at any time, right?

Money deposited in a bank is an asset on your personal balance sheet. But for the bank, it is recorded as a liability, because the bank must be ready to redeem any request for that money, at any time you want to withdraw it.

When a large number of customers want to withdraw their money simultaneously – known as a bank run and usually the result of panic – the bank’s reserves may not be able to cover the withdrawal amounts and the depositors’ money is at risk. Yes, there is FDIC insurance, but this is just another counterparty, and the FDIC in turn receives its money from the U.S. Treasury: another counterparty to add to the list. Furthermore, ask anyone in Cyprus who experienced a ‘bail-in’ if they still believe their deposits are completely safe in a bank!

Finally, what about cold hard cash, withdrawn and stuffed under a mattress? Isn’t this exactly the same as storing an ounce of gold? No. The Federal Reserve issues those notes, hence the words Federal Reserve Note at the top of each the bill. Therefore, the Federal Reserve Notes that are outstanding and in circulation are a line item recorded on the Federal Reserve’s balance sheet as a liability.

Since you cannot redeem a dollar for anything but another dollar, the counterparty risk is that the currency may fail completely or at least be devalued, something we have certainly witnessed consistently over the past hundred years.

Many people believe gold is a very risky financial asset when compared to traditional vehicles like stocks, bonds, savings accounts and even physical cash. Yet all of these possess counterparty risk, while outright ownership of gold has absolutely no counterparty risk. If protection against turbulent financial conditions is one of your goals, gold is the only financial asset in your portfolio that will not carry this very real and significant risk. 

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Florentine Florin: A Symbolic Reminder of Gold’s Global Appeal

Since the dawn of civilization, precious meals like gold and silver
Statue of Michelangelo's David in front of the Palazzo Vecchiohave been used for currency and wealth accumulation, starting with the first coin dating back to around 550 BC.

Italy’s Florence has a storied history concerning money and coinage which spans thousands of years, a trend which started in 1252 with the creation of the Florentine florin (3.5 grams and 54 grains of fine gold), this being the first European gold coin minted in sufficient quantities for European commerce since the 7th Century.

With its name of fleur-de-lys deriving from the flowering iris – the badge of Florence – the florin was destined to make a mark on the international currency market, since many Florentine banks had European branches. Its staying power as a dominant currency of commerce was tied to the outgrowth of the Florentine economy and its major stakeholders, which included money-changers, silk manufacturers, furriers and guilds.

Gold Florin, FlorenceThe weight of the original 1252 florin equaled the value of one lira in the local Florentine money. Interestingly, while the florin’s gold content stayed the same, the lira experienced such inflation that by 1500, the value of one florin was seven lira.

The florin did experience competition from European rivals in terms of its economic presence. Although their coins never attained the success of the florin, the Italian city of Genoa – its most prominent competitor – also began gold coinage in 1252.

The florin’s ascendancy led to wide acceptance across Europe, serving as an engine for international commerce throughout the continent. Its role at the time in fostering global economic growth held great significance; a level of status that no doubt led to its mention in Dante’s Divine Comedy, a perennial classic that was completed in 1320.

In recognition of its growing prominence, the British government released a 2-shilling version of the florin in 1849, valued at 1/10th of a Pound Sterling. This coin remained in circulation in the British currency system until the country’s foray into decimalization in 1971. Additionally, the Dutch florin – known as the guilder – endured until The Netherland’s currency disappeared in 2002 with the advent the Euro. This signaled the end of the florin’s long and illustrious reign as the world’s practical ‘gold standard’ of currency.

Nevertheless, the florin’s endurance throughout the ages is a symbolic reminder of gold’s continuing global appeal and its impact on world economies. 

At Anthem Vault, we have long championed the spirit and staying-power of gold, ensuing from legacy currencies like the florin. Over time, gold has continually demonstrated its dominance as a transactional asset that protects and enhances wealth. This track record underscores our commitment to making gold an easy-to-buy, safe, secure and affordable element of your savings, investment and wealth-protection strategy for you, your family and for future generations.  

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