Investing in Gold & Silver For Dummies. Paul Mladjenovic
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up in bankruptcy. Given that, the stock will go to zero.
Yes, stocks can fluctuate and can go up or down given the daily interaction of a huge group of buyers and sellers, but if the company’s management team and the overall company itself ceases to perform profitably, then the stock will suffer.
Bonds
In times of stock market mayhem and economic uncertainty, many investors tend to flock to bonds. Whether corporate bonds, municipal bonds, or what’s considered the safest category — U.S. Treasury Bonds — bonds are considered a safer bet than stocks during periods of economic difficulty such as a recession.
All things being equal, that’s generally true, especially in conventional times as has been the case in recent decades. But 2020–2030 isn’t a conventional time. Regardless, a bond is a perfect example of counterparty risk. A bond is essentially an asset for the bond buyer (basically the creditor), but on the other side of this, it’s a debt that must be satisfied by the debtor. Given this, a bond’s value is only as good as the promise or performance of the payer of the bond. The payer of the bond (a company, municipality, state, or sovereign government) is the counterparty.
Many times throughout history, bonds went to zero because the counterparty defaulted on the legal obligation to pay back any interest plus principal. But now we’re in unconventional times with epic amounts of trillion-dollar, unsustainable debt. During 2020–2030, you will see defaults. Corporate and municipal entities will default and/or pay creditors (such as investors) only a tiny fraction of what’s due. Bonds are paper assets entering a uniquely hazardous time in history.
ETFs and mutual funds
In the world of paper assets, ETFs and mutual funds are great, and a neat feature is that diversification is present to some extent in most of these vehicles. I love ETFs and mutual funds, I own them, and they’re indeed appropriate for many folks.
However, ETFs and mutual funds are only as good as the assets they own. If they own successful investments, the fund will do well; if they own failing investments, then the fund will definitely not do well. If a mutual fund, for example, has stocks and bonds, then these investments have counterparty risk. So do ETFs and mutual funds have counterparty risk? Yes!
I think that investing in gold and silver ETFs that guarantee ownership of physical bullion is as safe as you can get within the boundaries of a portfolio held at a brokerage account (whether a regular or retirement account). You still need to be aware of the counterparty risk of the issuer, but it does have greater safety when compared to alternative ETFs. For more details, check out Chapter 8.
Keep in mind that inverse and leveraged ETFs have financial and market risks, but they can be a good way to speculate in gold and silver in the event of a precious metals bull market. Read up on the details of these aggressive vehicles in Chapter 11.
Cash and bank investments
Typically, if you have a savings account, checking account, certificates of deposit, and other bank instruments, these don’t have market risk. In other words, they’re not usually traded in some marketplace and subject to fluctuation, and they don’t go up or down as you normally see, such as in the stock market. You know that if you put, say, $1,000 in a bank savings account in January, you could reasonably expect that money (plus some interest) to be there in December (unless you gave access to that relative who goes on spending binges).
www.fdic.gov.
Cash — whether it’s in your pocket, your sock drawer, that crevice in your couch, or any bank or credit union account — is subject to inflation risk. Inflation risk is a form of counterparty risk.
So, where is the counterparty risk? Monetary inflation comes from the management of the currency; it doesn’t “just happen.” It’s a direct result of the performance of those in charge of the currency. The “managers” of the currency are the folks at the central bank charged with the creation and management of the currency (also referred to as the “money supply”). Those who manage the currency are said to be conducting “monetary policy.” Ultimately, the central bank will generally follow the edicts of the political leaders, and seriously, what political leaders are immune to the idea of inflating the currency? It’s like creating money out of thin air.
It will happen when they want to be popular with the electorate and spend, spend, spend. This is why we have trillions in national debt. This is how entire countries bankrupt themselves. This is why hyperinflation has commonly dotted history’s landscape.