A counterparty is a party with whom you enter into a transaction. If party A sells something to party B, then B is a counterparty from As point of view and vice versa. For example, even if you own your car outright, or have the title deed to your house, you are still liable to pay tax on those assets. Although you own them, there is a counterparty risk – also known as default risk – the need to rely on someone else to fulfil a promise for your asset to maintain its value.
Unlike the old tables of clay with written promises to pay back the creditor, or fiat currency notes that the government promises are worth a certain value, purchasing physical bullion permits direct ownership of value without counterparty risk.
In other words, silver and gold are held by the creditor and, given that the value of the silver and gold is known and accepted everywhere, the value is redeemable anywhere. This is true even if the person who paid by means of these metals is far away, untrustworthy or dead. It is generally true that precious metal investors desire this characteristic in an investment above almost anything else. All investments that are characterised by inherent counterparty risk (such as fiat) currencies can never be considered money in the purest sense of the word. The lack of counterparty risks makes silver and gold particularly attractive to forward-thinking and judicious investors who understand the long-term consequences of investing in assets that have counterparty risks (units trusts, annuities, shares and so on).
Article courtesy of Going for Gold: A guide for the South African precious metal investor by Zoltan Erdey
