Myth: "Gold Bullion Has No Third-Party Risk"

Here's a quote from a recent article that got my attention: "The great advantage of gold bullion is that it has no third party risk." This kind of statement is made frequently in the gold investing world.

This is clearly not true. There is always third party risk with Gold Bullion. The risk is that third parties will steal it.

There are two ways of "owning" gold bullion:
(a) Storage Service - you own the gold and enter into a contract with someone to store it for you. This kind of gold ownership has counter-party risk in that the service provider may, in one way or another, be unable to provide your gold to you when you want it. The service provider may abscond with it, get robbed and not have insurance or have the government come in and confiscate it, etc.
(b) Personal Possession - you own and lock it up or hide it (or both) in something you own. This type of gold ownership does not have any counter-party risk as there are no contracts involved. It has a much higher risk than an ordinary bank account of someone entering your home and pointing a weapon in your face and demanding that you hand over the gold.

So, let's not kid ourselves. Life is risky. There is no risk-free way of preserving wealth on earth. We need to evaluate the risk and reward trade offs associated with any vehicle for preserving wealth and select our vehicles appropriately. The reduction or absence of counter-party risk may make bullion attractive in some cases, but it clearly has some "third-party risk".

Here's an interesting thought on the subject: "Do not store up for yourselves treasure on earth, where moth and rust corrupt and where thieves break in and steal but rather store up for yourselves treasure in heaven where moth and rust corrupt and where thieves do not break in and steal. For where you treasure is, there will your heart be also."

A really important question is: Is the Lord Jesus a third-party I can trust with my treasure?

MontyHigh, www.worldofwallstreet.us

Comments

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