Counterparty Risk Lesson

Counterparty risk, or the lack of it in owning physical gold and silver, is a term we refer to often.  With a global financial market in, quite simply, unchartered territory and the paper / synthetic gold and silver markets so tenuous, we see it as one of the key benefits of physical gold and silver.

On Friday the US markets were spooked on news that Third Avenue Management announced it was freezing withdrawals from a $788m credit mutual fund.  The fund is one of many that have popped up offering higher yielding junk bonds to feed a market looking for yield (ala risk) in a world of zero interest rates and QE for the last 7 years.  The problem now is there are massive outflows from these high yielding bond funds as the market begins to get nervous with crashing commodities and a weak global economy, especially ahead of this week’s incongruous US rate rise.  So investors buying into this mutual fund in good faith and thinking bonds, albeit of the junk variety, represented a lower risk than other instruments have simply been told ‘you can’t sell’, ‘you can’t have your money back’.  Counterparty risk playing out.

You may recall that the GFC was first triggered in August 2007 by BNP Paribas SA doing exactly the same from 3 of its investment funds.  Third Avenue Management are no BNP Paribas, but it highlights the various triggers lurking in a market in unprecedented territory that could bring on the next financial crisis.  Last time we had the US housing mortgage subprime catalyst, this time it could be the global oil and other commodities rout and the junk debt that sits behind that which could be the trigger.  This time however, the system is much more strung out, has far more global debt, has had trillions of dollars, yen, euro and yuan printed to try and fix it, all within a zero rate environment and there is nowhere else to go.

Friday’s events give just another insight into the inextricable link of this web of financial instruments all beholden to the other.  One investment stands apart and always has.  Real, ‘in your hands’ gold and silver stored independent of the system.