By: Treasure Coast Bullion Group -

So, you have decided that you want to purchase gold or silver to create a diversified portfolio and reduce your risk to stocks and bonds, but you are not sure what you should purchase. You have heard from friends that you can purchase a gold ETF, but there are so many available and it's hard to determine which one you should buy. You are also not sure what the difference is between purchasing a gold or silver ETF that holds bullion or one that holds companies that mine for gold and silver. While these decisions are difficult, one of the biggest risks an investor can take when purchasing a gold or silver ETF is credit risk.

Credit Risk

Historically the risk you accept in the capital markets has been focused on market risk and the fluctuations of a financial security. The 2008 financial crisis brought to light how important credit risk exposure can be and how an economy can move to the verge of bankruptcy if this type of exposure gets out of hand.

While banks and financial institutions faced difficulties during the years in the aftermath of the US financial crisis, the major cause of their serious problems was directly related to credit issues and the inability for companies to manage their credit exposure.

Defining Credit Risk

Credit risk is the exposure of one counterparty to another based on the notion that each party will meet their obligations. So, when you purchase a gold ETF, you assume that the ETF manager will purchase gold and will not default on payments when you exit your position. Unfortunately, this is not always the case.

Avoiding Credit Risk

Whenever you purchase a security, you are accepting credit risk. You are in a position where you are relying on the seller of the security to provide you with the asset that is expressed in their documentation. When you purchase a stock, you are at risk that the company will default, and you will be left with nothing. An example, of this, is when Lehman Brothers defaulted, and their stock price fell to zero.

One way to avoid credit risk is to purchase gold bullion or silver coins. If you purchase physical silver or gold, you do not need to rely on another company’s financials to protect your asset. When you purchase gold bars or silver coins and take delivery of this asset you are completely eliminating your credit risk.

Managing Credit Risk

Over the past 2-decades, credit risk management tools have developed that allow investment managers the capabilities of hedging their credit risk. The most noteworthy is the credit default swap or CDS. This is an agreement where the seller of the CDS will compensate the buyer in the event of a loan or transaction default. CDS can be thought of a default insurance.

Exchanges

The presence of a central counterparty like Chicago Mercantile Exchange Clearing is an important customer advantage that helps mitigate credit risk. CME Clearing’s status as the central counterparty allows it to deliver operational and financial efficiencies to market participants while reducing the risk inherent in trading activities.

Conclusion

Credit risk is an important component of any portfolio. The financial crisis involved huge amounts of credit exposure that was not accounted for, which created a domino effect toppling many of the large US financial institutions. By purchasing physical gold bar and silver bullion, you can completely avoid credit risk. If you are interested in purchasing silver bullion or gold bars, call Treasure Coast Bullion and or click here for your free investor kit.