Page 30 – Blanchard and Company

What Happens to a Buffalo with Three Legs?

Posted on December 10, 2021May 22, 2025 by Phoebe Wehrman — 1 Comment

On the American Plains in 1937, a Buffalo with three legs could easily have been shot by a rancher or eaten for dinner by a pack of wolves.

In the rare coin world, however, a 1937 Nickel with a three-legged Buffalo has become a legendary numismatic prize.

You’ve probably heard of the Indian Head or Buffalo nickel.

Many Americans of a certain age remember these coins surfacing in their pocket change regularly even into the 1970s. Minted from 1913 through 1938, the imposing and memorable coin designed by James Earle Fraser features a handsome Native American on the obverse and a bison on the reverse. It is the believed that “Black Diamond”, a North American bison in New York’s Central Park zoo, served as the inspiration for the coin’s reverse.

In 1937, the Denver Mint produced 17,826,000 of these legendary nickels composed of 75% copper and 25% nickel.

That year, a Denver Mint employee named Mr. Young, took his job quite seriously. He over polished the reverse die with an emery board in an effort to remove clash marks. The result of the excessively polished die variety? The front leg of the Buffalo missing! Hence the Denver Mint created three-legged Buffalo nickels in 1937.

Without a doubt, this is the most famous and highly sought-after key date in the Buffalo nickel series.

Collectors in the late 1930’s quickly discovered the Mint employee’s error and the 1937-D nickel became a classic even in its own time. These important Buffalo nickels were often pulled out of circulation in 1937 and 1938 as collectors eagerly examined their pocket change searching for this renowned coin.

Numismatic experts note that a unique diagnostic feature of the three-legged 1937-D Buffalo is a stream that appears below the bison’s stomach. See a photo of a 1937-D three-legged Buffalo here. Do you see the stream?

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Understanding Risk-Adjusted Returns

Posted on December 7, 2021May 22, 2025 by Phoebe Wehrman

If two separate investments deliver the exact same return over the same period which is better? The concept of risk-adjusted returns helps answer this question.

An investment’s risk-adjusted return reflects the amount of risk an asset presents to deliver a particular return, or possible return. In other words, the risk-adjusted return reflects not only the assets earning power but also the potential for loss.

Here is another way to think about risk-adjusted returns. Consider two hiking trails that both lead to the same destination. One trail is treacherous. It has steep cliffs, jagged rocks, and rushing water. The other trail is flat, and straight. The second path, which presents less risk, is the one with the higher risk-adjusted return because the traveler incurs less risk in their journey to the destination. The first path has a lower risk-adjusted return because the traveler faces more threats on their way to the destination. They may get there but doing so might mean spraining an ankle or breaking a bone.

This measurement is helpful in comparing two investments that may seem identical when examined based only on their historical return.

There are several ways to measure risk adjusted returns. One popular method is to use the Sharpe Ratio which takes the return of the investment less the risk-free rate and divides it by the investment’s standard deviation. The standard deviation could be thought of as more rocks and cliffs on the trail. Typically, a higher Sharpe ratio represents a better investment choice.

The Sharpe ratio illustrates why an investment that delivers 14% in returns might be less desirable than an investment that only delivers a return of 11%. Why? Because the investment that returns 14% can only do so by exposing the investor to greater risk than the risk associated with the investment offering an 11% return.

This concept illustrates how investors can reduce the overall risk profile of their portfolio by including assets with higher risk-adjusted returns. For example, one study showed that allocating 5% to gold can improve the risk-adjusted return in a portfolio consisting of 60% stocks, and 40% bonds.

Now is a good time for investors to revisit the risk-adjusted returns of their portfolio because volatility in the stock market is climbing. Moreover, the median P/E ratio of the S&P 500 over a period of about 150 years is 14.9 and the current P/E ratio is 28.6. This significantly higher figure suggests that investors today have considerably higher expectations for future stock market performance.

Investors can counterbalance this elevated risk by allocating a portion of their portfolio to gold. The reason for this strategy goes beyond today’s heightened P/E ratio. Gold will likely also serve as a volatility stabilizer as the world continues to struggle with a fractured international response to a changing COVID pandemic. Additionally, the Federal Reserve’s recent plans to step back from quantitative easing may also spark a flight from stocks into relatively safer investments.

Risk-adjusted returns reminds us that not all profits are the same even if the percentages are identical. The path journeyed to reach those returns often determines the traveler’s fate.

Dow Drops 600 Points: Uncovering Stock Market Danger

Posted on December 1, 2021May 22, 2025 by Phoebe Wehrman

On Tuesday, the Dow Jones Industrial average skidded over 600 points intraday. That followed a Black Friday session which saw stocks get hammered as well. What’s going on?

One factor that analysts warned about recently are the historically high levels of margin borrowing.

Indeed, the recent stock plunges reveals the fragility of the uptrend in stocks and underscores how quickly the market can reverse.

If you are unfamiliar with margin buying, it is a strategy that investors can use to buy stocks – using borrowed money. The problem? When stocks fall, those investors often panic and rush to sell or – even worse – get a ‘margin call’ from their brokerage firm requiring them to exit their positions, often at a loss.

Margin borrowings in October were up 42% versus a year ago levels at $935.9 billion, The Wall Street Journal reported on November 28th, using data from the Financial Industry Regulatory Authority, Wall Street’s self-regulator.

That’s a lot of borrowed money driving the recent stock market gains. And, those investors are quick to pull the plug, which can partly explain the pace of the stock market declines on Black Friday and on November 30th.

How does margin buying work? Typically, investors with as little as $2,000 in securities in a brokerage account can use those assets to get a loan, or approval to borrow money and ‘buy on margin.’ If those positions turn against them, the brokerage firm makes a ‘margin call’ requiring them to either put more money into the account or sell the stocks to pay back the loan. That adds to the flurry of selling on days the stock market is down big.

This year’s jump in margin buying is just another warning sign, along with high valuations, that the current stock market euphoria is a delicate house of cards, vulnerable to crumbling quickly.

The Bottom Line

Stock market pullbacks can be scary experiences for investors. What we are seeing now could be the canary in the coal mine. The stock market uptrend is vulnerable. Inflation is rising. The Federal Reserve is warning it may remove monetary accommodation sooner than expected. And, investors have been using borrowed money to play the stock market. If you are concerned, there is a proven strategy to reduce your risk.

For many investors, gold is the answer.

Investors who seek to create a properly diversified portfolio need to include assets that are non-correlated, or those that will rise when others fall. Gold is a non-correlated asset to equities and can help provide effective portfolio diversification. Typically during severe equity downturns, the price of gold has risen often substantially.

During periods of severe stock market stress, gold has traded significantly higher. When the S&P 500 has collapsed by more than 4.4% in a week, or the equivalent of declining by more than two standard deviations, the correlation between stocks and gold drops to -0.15 or -15%, according to the World Gold Council. What this means in plain English is that when stocks fall, gold prices tend to rise. When stocks fall quickly and sharply, gold tends to increase in value even faster as investors turn to the precious metals as a safe haven.

Holding as much as 10% of your portfolio in gold has improved long-run performance returns, according to research from the World Gold Council. It helps investors manage risk and smooth returns, especially during periods of stock market volatility or downturns.

As an investment, gold is considered a safe harbor and offers individuals the opportunity to preserve and grow wealth, especially when other asset classes aren’t performing as well. Gold acts as an insurance policy, a hedge against equity market declines and a vehicle to protect and grow wealth. This paid off for gold investors after the 2008 global financial crisis when gold went from $700 to $1,900.

Do you own enough?

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Examining Stock Market Risk Right Now

Little Known Banking Rules That Could Affect You

Posted on November 29, 2021May 22, 2025 by Blanchard Admin — 1 Comment

How would you feel if your bank denied you access to your money? Or, said you needed to wait 10 days before making a transaction like a wire transfer?

While it may sound like a bad dream, it’s happened to many Americans – including Blanchard clients. If this has in fact already happened to you – don’t despair – you aren’t alone.

There are a surprising number of little known banking rules and regulations that can stand between you and your money – especially if you need it fast.

Even worse, banks are delaying customer’s access to their own money – for 10 days or more.

When you have money in a U.S. bank account, you expect to have access to your money when you need it. Sadly, that’s not always the case.

9 real-life examples our clients told us about what happened when they tried to invest in tangible asset and wire funds:

“What is this wire for? We need to know or will not send the funds.”
The bank wasn’t aware of Blanchard and required bank officials to research the company first before releasing the wire transfer.
“I tried to withdraw a sum over $10,000. The bank told me to come back tomorrow, that I couldn’t take it out that much cash on a moment’s notice.”
“I wanted to send a $20,000 wire transfer. The main branch of the bank said their internet was down and they couldn’t send it. I went to another bank branch and they said they had to vet Blanchard for 30 days before releasing the wire!”
“Before agreeing to the send the wire, the bank made me fill out a form detailing where the money was going and why it was going there.”
“The teller told me no, they won’t approve the wire transfer. I had to fill out documents and talk to a manager first.”
“My credit union ran a ‘credit check’ on Blanchard before agreeing to transfer the money. I’ve been a customer at this credit union for over 30 years. My wire transfer amount was only $1,500.”
“The bank manager told me ‘I don’t know where this money is going’ even though I assured them I knew Blanchard well and had done business with Blanchard for years.”
“My bank held a wire for 5 days before sending funds because they didn’t know who Blanchard was.”

As you may already know, Blanchard was founded in New Orleans in 1975 – and we have been in business for close to 50 years. With five offices across the nation, we’ve served over 600,000 clients.

Seriously. It’s your money. Should you have to jump through hoops to get it or make investments of your choice?

While these banks attempted to cast doubt on your own financial moves, our clients all persevered and eventually were able to gain the access they need and deserve – to their own money!

Some banks are clearly going too far.

A 2020 Financial Times article reported on thousands of complaints by bank customer’s whose accounts were simply frozen. That’s right. Zero access to your cash, with no warning.

“The greater your bank balance and your international connections, the more likely you are to match the profile. The decision to freeze an account often happens with no warning or explanation. Customers suddenly find they have no access to cash; their direct debits and standing orders are suspended,” the Financial Times said.

In one instance, Alex tried to send a bank transfer to his sister last year (and she had the same last name as he did!), yet it wouldn’t go through. The bank told him to call a number to discuss this and was told there had been suspicious activity and his account had been locked.

“My sister shares my surname, yet the bank decided this was so suspicious it immediately locked down all my accounts and turned off my internet banking access,” Alex told the Financial Times.

Are banks overreaching? Probably. Yet, this is a trend. You know better than anyone else what type of investments are right for you and your family. Don’t let anyone at your bank cast doubt on your financial decisions.

If you encounter difficulties of this nature, please know this is more common than you think. Your portfolio manager at Blanchard is always happy to assist where possible.

The surprising regulations, rules and sometimes arbitrary decisions that banks make over access to your money is another reminder about the benefit to holding a portion of your assets in tangible assets like gold and silver bullion and coins:

Privacy.
Portability and instant access to your capital.
Simplified wealth transfer between generations.

Gold, this is just another reason, you can put your trust in precious metals. Take that to the vault!

Examining Stock Market Risk Right Now

Posted on November 18, 2021May 22, 2025 by Phoebe Wehrman

While many Americans struggle with the challenges of rising inflation – at the grocery store, at the gas pump, rising rent and more, stock market investors are a complacent bunch right now.

The U.S. stock market is indeed enjoying double-digit gains in 2021, propelled higher by government spending that flooded the economy during the Covid crisis and the Fed’s rock-bottom interest rates.

Can this continue?

There is an old market adage: the stock market takes the stairs up and the elevator down.

That adage reminds us that while stock market gains tend to be slow and steady, stock market crashes tend to be violent, fast and usually quite unexpected.

There are three major risks right now hovering beneath the rosy stock market performance figures this year, which are worth examining. These include: 1) valuation levels 2) margin debt and 3) interest rate shock. Today, we’ll explore valuation levels.

You’ve probably heard that the stock market is “overvalued” by many measures.

Experts like to examine longer-term measures like the Shiller P/E or price-to-earnings ratio, which looks at average earnings over the past 10 years, as a particularly useful metric to determine stock market risk.

Stock market valuations continue to increase. In September, the Shiller CAPE ratio hit 38.34, which marked the fourth month in a row with higher valuations and the highest level since late 2000 (just before the Dot-com bubble burst in 2001).

You may recall, in the late 1990’s, internet stocks skyrocketed – the Dot-com boom, they called it. Many companies had zero earnings, yet speculators drove technology stocks higher and higher betting that someday these Dot-com firms would turn a profit.

The primary cause of the 2001 stock market crash? Overvalued stocks.

It was a painful stock market crash. The NASDAQ stock index lost a stunning 75% of its value from 2000-2002.

That means if you had $100,000 invested in the NASDAQ at the beginning of 2000, your account value fell to $25,000 just two years later.

Then, it took a very long 15 years for the Nasdaq Index to reclaim its 2001 peak. So, that means you would have had to wait 15 years for your account balance to return to the $100,000 level.

How would you feel if your stock portfolio fell even 50% right now and – then took 15 years to get back to break-even?

Let’s shift gears and look at how gold performed during that 15-year period from 2000 to 2015.

Gold climbed 554% from its 2000 low at $276 an ounce to its 2011 high above $1,800 an ounce, before entering a minor correction period and slipping to $1,226 – which registered an overall 344% return for that 15-year period.

The Bottom Line

Stock market crashes can be frightening and even traumatic experiences for investors.

It is another reminder why diversification is so important. Diversification into gold is a proven portfolio diversifier. Holding a position in gold reduces your total account drawdown level during stock market crashes, as gold tends to climb when equities fall. Learn more here.

Check back soon for another analysis of stock market margin debt risks – and why that is worth paying attention to.

What Experts Forecast for The Economy In 2022

Posted on November 15, 2021May 22, 2025 by Phoebe Wehrman

With less than eight weeks before the end of the year, many are beginning to ask what the US economy might look like in 2022.

The recovery from COVID continues to push forward but the movement is stubbornly slow. Throughout the mid-1990s and mid-2000s the annual U.S. GDP growth surpassed 3 percent. Many analysts believe this performance will be unattainable in the coming years.

There are three reasons for this low growth outlook.

First, long-term unemployment numbers have been persistently low. As a result, economic activity at the consumer level remains muted.

Second, the 2020 recession prevented many businesses from investing in their operations which dramatically slowed innovation. The effect of this interruption will be lasting.

Third, the baby-boom generation continues to enter retirement in massive numbers. This trend accelerated during COVID’s peak when baby-boomers dropped out of the labor force amid lockdowns, layoffs, and plummeting equity markets.

These reasons explain why the U.S. Bureau of Labor Statistics expects 2022 to usher in a period of slow GDP growth that will become the “new normal.” This, however, is just one opinion. What are other analysts forecasting?

Others have similarly low expectations. Goldman Sachs recently reduced their economic growth target for the U.S. to 4.0% for 2022. One reason for this outlook was their expectation of a “longer lasting virus drag on virus-sensitive consumer services.” Goldman also expects consumers to spend less because of the wide scale shift to working from home.

The outlook from U.S. Bureau of Labor Statistics and Goldman Sachs also agrees with forecasts from The Conference Board, a non-profit research organization founded more than 100 years ago. Their analysis, which examines the global GDP, suggests a deceleration as “quarterly growth rates recorded toward the end of next year will likely show a slowing global economy.”

These challenges are likely to be intensified by existing global supply chain challenges which have broken the connection between businesses and consumers.

These projections do not portend doom, but they do paint a very underwhelming picture of the future U.S. and global economy. For investors this likely means that there will be fewer ways to generate a return on their savings. Moreover, those places that do generate an adequate return may present greater risk as the world continues to adjust to a new system. This new system will be characterized by less reliance on global trade, digital disruption, a more geographically distributed workforce, and a decrease in consumer activity.

In this setting, investors should consider defensive moves that diversify their holdings across assets that are not as closely tied to U.S. and global economic growth. Additionally, investors will need to consider assets that can weather inflation. For most investors gold is the answer given that it has delivered an average return of 15% during periods when inflation exceeds 3% according to research from the World Gold Council.

2022 is fast approaching and the time to form a plan is now.

The Intriguing History Behind the 1880 Trade Dollar

Posted on November 11, 2021May 22, 2025 by Blanchard Admin — 3 Comments

What currency should be used in world trade? Over 150 years ago, China and the United States wrangled over that very question – just as they do today.

For those of you that don’t follow global economics closely, today, importers and exporters that buy and sell goods across country lines like crude oil, diamonds, cars and vehicle parts and even computers – primarily use the U.S. dollar to complete the transactions. Example: when China wants to buy crude oil from Saudi Arabia – typically those transactions are completed in U.S. dollars. (Although, China is actively exploring alternatives to cut the U.S. dollar out of that picture).

Rewinding history back to the late 1860s and early ’70s, trade between the United States and China was increasing.

Americans were increasingly purchasing and enjoying items like tea and silk from China. However, a threat to this international trade emerged from the unlikeliest of things: the Mexican peso.

It turns out that many Chinese businesses preferred the use the Mexican peso instead of U.S. currency because the peso contained more silver than the standard U.S. dollar. This meant U.S. businesses had to exchange their dollars for pesos every time they wanted to buy tea or silk or other goods from China, which generated high commission fees for U.S. business owners.

The federal government had a solution to this problem: mint a dollar-sized coin known as a “trade dollar” for use in Asian business trade.

To entice the Chinese to use the American Trade Dollar, the U.S. put more silver content into its coin.

The Trade Dollar consisted of 90% silver and weighed slightly more than the peso (420 grains vs. 416). A unique feature of the Trade Dollar is the wording beneath the eagle on the reverse of the coin” “420 GRAINS .900 FINE.” This was included to convince Chinese merchants of its value.

The U.S. minted silver Trade Dollars from 1873 through 1885. During the first two years of production, the United States sent nearly all the minted coins abroad to ease trade problems.

The Trade Dollar was a success in the Orient. Indeed, Chinese businesses took a liking to the coin and preferred its heavier weight over the Mexican peso.

Some Trade Dollars bear Chinese characters called “chop” marks indented on their surface. Experts believe that Chinese merchants punched these chop marks onto the surface of the Trade Dollars as a strategy to test their authenticity. As the Trade Dollar moved from one Chinese merchant to another it would occasionally receive multiple chop marks, adding to the fascinating history of these coins, which were used heavily in international trade.

However, mining activity at home altered the course of history for the Trade Dollar. U.S. mines in the western regions of the country were yielding enormous amounts of silver. This influx of precious metal disrupted the supply and demand dynamics in the market. Silver prices plummeted. As a result, the Trade Dollar fell to an intrinsic value of just 80 cents. Soon after, the U.S. saw large amounts of Trade Dollars flow back into the country where Americans spent the coins at their face value. In response, Congress acted and revoked the coin’s status as legal tender in July of 1876. They continued to mint the coin, but only for the purpose of exportation.

Just two years later, Treasury Secretary John Sherman ended production of the Trade Dollars. However, from 1879 forward, the Treasury issued proof strikes expressly for collectors. Eventually, in early 1887, legislators passed a law allowing those holding U.S. Trade Dollars to redeem their coins. This act brought approximately 8 million U.S. Trade Dollars back into the government’s hands.

Today, the coins are highly sought after by collectors. The 1884 and 1885 trade dollars are considered to be the rarest of these desirable coins.

Are you curious about what this intriguing coin looks like? See an 1880 Trade Dollar here.

Fed Pulls Back on Emergency Support to Economy

Posted on November 3, 2021May 22, 2025 by Blanchard Admin

Nearly two years after COVID-19 hit our shores, sending our nation into an economic tailspin, the Federal Reserve announced today it is dialing back on its emergency bond-buying program.

Wall Street expected today’s announcement that the Fed would taper its monthly bond purchases. Gold registered little reaction to the news, recently trading at around $1,765 an ounce.

“In light of the substantial further progress the economy has made toward the Committee’s goals since last December, the Committee decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities,” the Fed said today. The Fed had been buying $120 billion in U.S. Treasury and mortgage-back securities each month since early in the COVID crisis.

The Fed kept its benchmark interest rate unchanged – at the rock-bottom 0%-0.25% level.

The Fed weighed in on inflation today, too. Americans are confronting higher prices on a range of consumer goods and inflation hit a 30-year high this year.

While the Fed has been adamant that current inflation levels are “transitory,” today’s post-meeting statement qualified that by adding in that inflation is “expected to” be temporary.

Many other economists aren’t so sure. Once inflation takes root in the economy, it can tighten its grip and spread, often ferociously.

“Our sense is that the inflation and price increases will get worse in the near term before they get better,” Kathy Bostjancic, Chief U.S. Financial Economist at Oxford Economics told CBS News today.

For now, the Fed is willing to tolerate higher inflation in an attempt to move the economy back toward full employment. Will the gamble work?

If this roll of the dice fails to produce falling inflation in 2022, the Fed will be forced to raise interest rates sharply to contain inflation. That will spell trouble, and perhaps even a stock market crash and recession. The stakes are high.

In today’s uncertain economic times, gold continues to offer investors a safe haven investment, an asset to hedge against recession and stock market volatility and also as a proven method to maintain your purchasing power in these historic inflationary times.

Where Are We In the Business Cycle?

Posted on November 1, 2021May 22, 2025 by Blanchard Admin

Economists like to define business cycles through four stages: expansion, peak, contraction and trough.

What does this mean exactly? During an expansion phase of the economy – gross domestic product (GDP) is growing and expanding. Businesses are expanding, hiring new people, investing in their businesses and, typically, the stock market is climbing. By that definition – it’s easy to say we are in the expansion phase right now.

But have we peaked already?

Rising prices – or inflation – is a sign of the peak stage. Overconfident stock market investors is another characteristic of the peak stage. Sound familiar?

We did have a severe bear market in stocks after COVID hit last year – yet notably – it was the shortest bear market in history. (Bear markets are typically defined as a stock market pullback of 20% or more.)

Looking back, the S&P 500 hit an all-time high in February, 2020 – then plunged a shocking 34% the next month. The swift turnaround in stocks was unprecedented – by August 2020, the S&P 500 had fully recovered.

Was that bear market in stocks normal? Not even close. The average length of a bear market is 349 days with an average decline of 36%, according to Invesco.

Compare that to the 2008 Financial Crisis. The S&P 500 plunged a nasty 52% — and the bear market lasted 1.3 years.

As consumer prices on nearly everything rise now, and stocks climb – this typically signals a feverish type of peak to the expansion phase. Many believe we have already peaked. In fact, some economic data is already revealing a slowdown.

What comes next in the business cycle? The contraction phase.

Economists measure the contraction from the peak to the trough. The contraction phase officially becomes a “recession” once two consecutive quarters of negative GDP growth occur.

When was our last recession? Yep, it was last year – from February 2020 to April 2020 – lasting an unprecedented two months.

Not only did we see the shortest bear market in history last year, we saw the shortest recession in U.S. history, as measured by the National Bureau of Economic Research.

What does that suggest? Some believe that those events were so short that they hardly count. The 2020 recession wasn’t long enough to equalize the pressures of a normal business cycle.

What could that mean going forward? The next recession could be longer. Much longer.

What can trigger economic contractions and stock bear markets you might ask? Rising interest rates are a big factor. Rising interest rates tamp down consumer activity and business investment and spending. Rising interest rates also negatively affect earnings and stock prices. The idea is that higher borrowing costs means companies are paying more to service their debt, which weighs on profits.

One of the many reasons that people like you may invest in gold or are thinking about investing in tangible assets is as a portfolio hedge. Gold and rare coins are a hedge for many economic variables including a bear market in stocks.

Historically, gold becomes inversely correlated to the stock market during times of equity market stress. That means when stock prices go down sharply, historically gold prices have climbed significantly.

While many stock market investors are overconfident right now, it can be useful to step back and view the big picture. Consider where we are in the business cycle now – and consider if you are properly diversified for what comes next. If you have questions, we can help.

Evergrande, Counterparty Risk, and Gold

Posted on October 26, 2021May 22, 2025 by Blanchard Admin

In recent weeks, the crisis within Evergrande has reminded investors of counterparty risk.

Counterparty risk is the possibility that one of the parties involved in a transaction might default on their obligations. People often use the term counterparty risk and default risk interchangeably. Default risk is the possibility that one person or company will fail to make the required payments on their debt.

Evergrande is a towering example of counterparty risk. In August of this year, the Chinese property developer warned that it would default on their debts if they were unable to raise sufficient cash in time. This news sparked fear among investors. Those fears were confirmed the following month when Evergrande failed to make their off-shore bond payments of $83.5 million. In October, the company failed to meet three more payments totaling $148 million. These defaults have left many individual Chinese investors devastated.

In recent weeks, the company has attempted to remedy the problem by selling off assets to generate the capital necessary to stay afloat.

What makes this event so concerning is that it happened during a time when China appeared to be enacting a strict regulation intended to avoid these kinds of defaults. That regulation is called the “three red lines.” This refers to China’s attempt to limit how much a company can borrow based on three metrics; the company’s debt-to-cash, debt-to-equity, and debt-to-assets. Despite these regulations, Evergrande has vaporized the wealth of many Chinese households.

Many journalists have made comparisons to Lehman Brothers, which is a similar story of counterparty risk. In fact, Evergrande and Lehman Brothers have more in common than counterparty risk gone awry. Both entities were massive institutions. Both had the appearance of a monolithic corporation that could never fail. However, the fallout from both disasters is a reminder that counterparty risk is very real. When debts go unpaid, businesses fail and investors are left holding the bag.

Gold is free from counterparty risk. As a precious metal, it does not generate cash by meeting quarterly earning estimates or by satisfying debt obligations. The value of gold comes from its scarcity, global appeal, and application in jewelry and technology. Freedom from counterparty risk is a major benefit to long-term investors because over the course of decades we are all likely to experience at least some of the effects of this risk.

Consider that total global defaults on debt were $430 billion in 2008 during the worldwide financial crisis. That is what counterparty risk looks like when things go wrong.

The most threatening risks are often those that go unseen. Counterparty risk is a perfect example. It is quiet until it can no longer be silenced and when investors finally hear it, the sound is deafening.

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