Counterparty Risk: What Gold Investors Need to Know

When Silicon Valley Bank (SVB) collapsed in March 2023, depositors with balances above $250,000 discovered that their cash wasn’t sitting in a vault. It was the bank’s liability, backed entirely by the bank’s solvency. SVB and Signature Bank’s failures were the largest U.S. bank collapses since 2008, and they reminded investors that nearly every financial instrument rests on a promise someone else has to keep. That promise has a name: counterparty risk.

Here, we cover what counterparty risk is, where it shows up in your portfolio, and why physical gold stands alone as the one major asset with zero counterparty risk.

Understanding counterparty risk

Counterparty risk is the risk that the other party to a financial transaction won’t follow through on what they owe you. Almost every investment you hold depends on someone else doing what they promised. A stock is a claim on a company. A bond is a loan that has to get paid back, and a savings account is money the bank is holding for you.

If any of those parties run into trouble, it puts your investment at risk.

Types of counterparty risk in financial markets

Counterparty risk refers to:

• Counterparty credit risk. The risk that whoever you’re dealing with won’t have the money to pay you when the time comes. This shows up in lending and bonds, where the borrower’s financial health decides whether you get paid back.
• Counterparty default. The event of the other party failing to meet their obligation, whether through bankruptcy, fraud, or just walking away. Credit risk is the probability; default is what happens when that probability hits.
• Settlement risk. The risk that a transaction doesn’t complete as agreed. You deliver your end, and the other side doesn’t deliver theirs. Common in currency trades, derivative markets, and any contract with multiple parties involved in execution.
• Legal risk: The risk that the fine print limits what you can recover. This could be risks in storage contracts and account agreements where the terms favor the institution if something goes wrong.

Counterparty risk in your financial portfolio

Examples of where you have counterparty risk in your investments today:

• Stocks: A share of stock gives you a claim on a company’s assets and future earnings. If that company collapses, those claims can become worthless even if the business once had value.
• Corporate bonds: You’re lending money to a company and trusting them to pay you back with interest. When issuers can’t, bondholders may recover only a fraction of what they’re owed. Sometimes nothing at all.
• Bank deposits: The FDIC insures deposits up to $250,000 per depositor per institution. Everything above that is an unsecured claim on the bank. The depositors above that threshold at SVB and Signature Bank discovered this the hard way in 2023.
• Your 401(k) and retirement accounts: These accounts hold stocks, bonds, and mutual funds, all of which carry their own counterparty exposure. The account wrapper protects you from your brokerage’s failure in most cases, but the underlying investments still depend on issuers performing.

Here’s an overview of potential risks of counterparty financial obligations:

Investment	Who you’re trusting	What can go wrong
Stocks	The company you bought shares in	Bankruptcy, fraud, or business failure can wipe out your claim
Corporate bonds	The company that issued the debt	Issuer default, where bondholders may recover little or nothing
Bank deposits	The bank holding your cash	Anything above the $250K FDIC limit becomes an unsecured claim if the bank fails
401(k) and IRAs	The companies, governments, and funds the account holds	Each underlying investment carries its own counterparty exposure

Paper gold and counterparty risk

Investors buy gold to protect their wealth, but the kind of gold investment matters because paper gold doesn’t help you mitigate counterparty risk.

Gold ETFs

When you buy shares in a gold ETF like GLD or IAU, you don’t own gold. You own shares in a trust that claims to hold gold on your behalf. Your safety depends on the fund sponsor managing things correctly and the custodian bank staying solvent. Subcustodians may also hold the metal without written custody agreements or direct oversight.

The very financial institutions many gold investors are trying to hedge against are the ones in the center of this chain.

Gold mining stocks

When you buy shares in a gold mining company, you don’t own gold. You own a stake in a company that mines it. Your investment depends on the company hitting production targets and managing costs. Mining stocks can fall even when gold prices rise, and the company can go bankrupt entirely, which would wipe out your investment regardless of what gold itself is doing.

Gold mutual funds

Gold mutual funds pool investor money to buy a basket of gold-related assets, often a mix of mining stocks and futures contracts. You own shares in the fund, not gold. Your safety depends on the fund company managing the portfolio responsibly and the underlying investments performing.

Gold futures and options

Gold futures contracts give you the right or obligation to buy or sell gold at a set price on a future date. You don’t own any gold, you own a contract with a counterparty who has to deliver. Futures depend on clearing houses and brokerages staying solvent, and they involve leverage, so even small price changes can wipe out your position quickly.

Gold certificates

A gold certificate is a paper claim on gold held by a bank or financial institution. You’re trusting them to hold the gold and deliver it when you ask. If the issuing institution fails, your certificate becomes a claim in bankruptcy proceedings, alongside other unsecured creditors.

We recently discussed paper versus physical gold on our podcast:

Physical gold: the one asset with no counterparty risk

Hold physical gold yourself or keep it in an allocated vault account, and you own the metal outright. There are no contractual obligations for anyone else.

Gold can’t be defaulted on because nobody owes it to you since you already have it. Regulators can’t freeze it because it isn’t sitting in a financial institution’s account, and central banks can’t devalue it because it isn’t anyone’s currency.

In thousands of years of financial history, gold has never become worthless because of someone else’s failure.

How to own gold without counterparty risk

Here are the best ways to own gold, eliminate counterparty risk, and increase the financial stability of your portfolio.

Physical coins and bars

Owning gold coins or bars directly, stored in your home or a personal safe, eliminates counterparty risk completely. You can buy widely recognized coins like American Gold Eagles, Canadian Maple Leafs, or bars from refiners like PAMP Suisse or the Perth Mint. These are easy to authenticate and easy to sell when you’re ready.

You will need to decide how to store your gold, and depending on where you keep it, you may also have to buy separate insurance.

Allocated vault storage

With allocated storage, you’ll have specific bars or coins registered to your name. You’re the legal owner of the identified metal, not a creditor of the vault. If the storage facility failed, your metal would remain yours. It wouldn’t become part of the operator’s assets in a bankruptcy because it was never on their balance sheet to begin with.

Gold IRA with an approved depository

A Gold IRA lets you hold physical gold inside a tax-advantaged retirement account. The metal sits at an IRS-approved depository in your IRA’s name, managed through a custodian. You own real gold rather than shares in a fund, though you still rely on the custodian and depository to look after it until you’re ready to withdraw in retirement.

Here’s a comparison of the best options for owning gold to manage your risk:

Option	Storage	Tradeoff
Physical coins and bars	At home or in a safe deposit box	You handle security and insurance
Allocated vault storage	A private vault, in your name	Annual storage fees
Gold IRA with depository	An IRS-approved depository in your IRA’s name	You can’t take possession until retirement

How much gold should you own?

Gold gives you a way to manage counterparty risk in your portfolio, but it’s not a complete replacement for all your investments. Most advisors recommend holding between 5%-20% of your portfolio in gold, depending on your goals.

The right amount for you depends on your risk tolerance:

• Conservative (2-5%): For new or risk-averse investors. This gives you a small safety hedge against market volatility without giving up much exposure to stocks and bonds.
• Balanced (5-10%): For most long-term investors. This allocation gives you standard diversification with inflation protection.
• Stronger hedge (10-15%): For investors who want more downside protection. A bigger cushion can help you with risk management during economic uncertainty.
• Aggressive (15-20%+): For investors very worried about economic risk. This gives you maximum downside protection if you’re concerned about inflation or financial system instability.

Pros and cons of owning physical gold

Like any investment, you should consider the pros and cons before buying gold to reduce counterparty risk.

Pros of owning physical gold

Besides independence from central counterparties, there are other benefits to adding physical gold to your portfolio.

• Store of wealth: Gold has served as a store of value through banking crises, currency collapses, and periods when electronic markets stopped functioning normally. It doesn’t need any system to be up and running.
• Independent asset: Ever since President Nixon closed the gold window in 1971, gold hasn’t been tied to the dollar or the broader financial system. That’s part of why it moves differently from stocks and bonds.
• Inflation protection: Governments can easily print more currency. They can’t mine more gold on demand. The supply grows slowly and predictably, which is part of why gold has held purchasing power across centuries while paper currencies have not.

Cons of owning physical gold

There are a few drawbacks of owning physical gold:

• No income: Gold doesn’t pay dividends or interest. It’s a defensive asset that’s like having insurance for economic uncertainty and financial losses from other asset classes.
• Storage: You’ll have ongoing costs to store your gold safely. That could be the price of a home safe, fees for a bank safe deposit box, or annual costs at a private vault. You may also need to add a rider to your homeowner’s insurance to cover the metals.
• Less liquid: Selling gold takes a couple of weeks compared to paper assets, which you can sell with a few clicks. You’ll also need to find a buyer or dealer, and you may not always get the full spot price when you sell.
• Short-term price volatility: Gold’s long-term track record is strong, but it can have flat or down years. Plan to hold gold for the long haul rather than trading in and out.

At a glance comparison of physical gold pros and cons

Pros	Cons
Holds value under stress. Doesn’t depend on any financial system being operational to retain its worth.	No income. Return comes from price appreciation only. No dividends or interest payments.
Moves independently. Tends to hold its ground when stocks and bonds fall at the same time.	A home safe, safe deposit box, or professional vault all carry real ongoing costs.
Nobody’s liability. Can’t be defaulted on, frozen, or discharged in bankruptcy because it isn’t a promise.	Requires a dealer relationship. Buying and selling physical metal takes more thought than an online trade.
Can’t be inflated away. Supply grows slowly; no government can manufacture more on demand.	Short-term volatility. Solid long-term record, but gold can have flat or down years.

Final thoughts on counterparty risk

Every investment most people hold depends on someone else keeping a promise. That’s how modern finance works. But when the system comes under pressure, as it did in 2008 and again in 2023, the counterparty exposure becomes real, very fast.

Physical gold doesn’t ask anyone to keep a promise. It’s the one major asset that works the same whether the financial system is functioning normally or not.

To learn more about protecting your wealth with gold, connect with the Swiss America team today!

Counterparty risk: FAQs

Does physical gold really have zero counterparty risk?

Yes, but only when you own the metal directly. Here’s how the three storage options compare:

• Direct possession: When you hold coins or bars yourself at home or in a safe deposit box, no one else is involved. The metal belongs to you.
• Allocated storage: Specific bars are registered in your name and held off the vault operator’s balance sheet. If the operator went bankrupt, your bars wouldn’t be part of their assets, so you’d get them back.
• Unallocated storage: You have a claim on a shared pool of metal, but no specific bars are in your name. If the institution fails during a crisis, you become an unsecured creditor competing for what’s left.

Do gold ETFs have counterparty risk?

Yes, and it often catches investors off guard. They bought ETFs to get gold exposure without the hassle of physical ownership, but the counterparty chain in a typical gold ETF is longer than most people realize.

• The fund sponsor: Manages the trust structure on your behalf. Problems with the sponsor can disrupt your investment for reasons that have nothing to do with what gold is doing.
• The custodian bank: Holds the physical metal. In GLD, that’s HSBC, one of the world’s largest banks, and exactly the kind of institution gold investors are trying to hedge against. A custodian failure during a banking crisis is when you’d most want gold’s protection, and ETFs leave you exposed to that risk.
• Subcustodians: Major ETF custodians can hire subcustodians to hold the metal, sometimes without written custody agreements or direct oversight from the trustee. The further down that chain your gold sits, the more counterparties stand between you and it. Each one is a potential point of failure.

What’s the difference between allocated and unallocated gold storage?

This is one of the most important questions to ask before opening a gold storage account or buying any gold-backed product.

• Allocated: This means you own a specific metal. Your statement shows the bar numbers and weights. Those particular bars belong to you legally. The vault operator can’t lend them out or use them as collateral.
• Unallocated: This type is when you own a claim on a pool of metals. The institution holds gold and owes you a share of it, but your portion isn’t earmarked. They can lend out or use your gold as collateral. If the institution fails, your claim goes into bankruptcy alongside other unsecured debts. The gold you thought you owned may not be there.
• Read the agreement: Review the gold storage agreement to understand which type of storage you’re getting.

Is a Gold IRA free of counterparty risk?

The physical gold inside a Gold IRA has no issuer or default risk of its own, but your account still depends on the custodian and depository to look after it properly. The account structure adds some paperwork on top, but it doesn’t change what the gold is or who it’s held for.

• Storage at an IRS-approved depository: Your gold sits at a regulated, audited facility under a storage agreement that lays out how it’s owned and stored. With segregated or allocated storage, your holdings are kept separate for your account, so they shouldn’t be available to cover the depository’s debts.
• The IRA custodian: The custodian handles paperwork and IRS compliance while a third-party depository holds the actual metal. If the custodian goes out of business, your metal would still be at the depository under the same storage agreement.
• IRS storage rules: You can’t take personal possession of the metal while it’s inside the IRA, because IRS rules require IRA-owned precious metals to stay with an approved trustee or depository.

What happened to gold during past financial crises when counterparty risk spiked?

Gold’s track record during counterparty stress is one of the strongest arguments for owning it.

• 2008 financial crisis: Mortgage-backed securities collapsed, and banks stopped trusting each other. Investors with heavy exposure to defaulting counterparty assets watched their holdings lose value through no fault of their own. Physical gold rose during this period as investors moved toward assets that didn’t require anyone else to perform.
• European sovereign debt crisis: Greek government bonds lost more than half their value as counterparty risk on sovereign debt became undeniable. Investors who had believed government bonds were “safe” discovered that a government’s promise is still a promise, and it can be broken. Gold held purchasing power through that period regardless of what governments were doing.
• 2023 U.S. bank failures: SVB and Signature Bank failed within days of each other. Depositors above the FDIC limit discovered that their cash was a counterparty claim. Gold investors held a physical asset, so they didn’t face the same exposure.

The information in this post is for informational purposes only and should not be considered tax or legal advice. Please consult with your own tax professionals before making any decisions or taking action based on this information.