Buying and Selling and the Investor’s Risk

Investments market risk in the price of the stocks and bonds, and the payback is supposed to be commensurate with the amount of risk you buy. You can bet on a long shot at a low price with the hope of great gains, but it unfortunately carries the risk that you will lose your money.

When you buy insurance, the insurance company buys your risk. Risk that you will be a safe driver, risk that you will live a long life and not cash in that life insurance policy, health insurance bets you will live healthy and spend more on the insurance than you file in claims.

The banks, after the repeal of the Glass Steagall Act added a new twist in the buying and selling of risk. When banks were making mortgage contracts during the last 10-15 years, they were being compensated on the number, size and interest rate charged on the mortgages. The previous behavior of banks, in managing risk, when they loaned money for mortgages, went out the window. People were not screened to determine if they could afford the mortgage and in fact many mortgages were structured in a way to allow the customer to make low payments for a period of time, and after the introductory period the payments increased drastically. This allowed people to buy a home they could not afford and this mentality was a recipe for disaster.

The second part of the risk play involving banks and mortgage risk was the packaging of mortgage risk in the form of CDOs or Collateralized Debt Obligations. CDOs packaged mortgage risk at varying risk levels to sell to investors. The problem was that many high risk mortgages were packaged in CDOs and sold as AAA rated investments. When the housing market contracted investors lost their money. Banks had also structured the investments so that the more money the investor’s lost, the banks would make even more money.

The complexity of the investment landscape has prompted many people to invest in gold, including gold bullion coins. The old adage that any investment should be able to be explained on the back of a napkin makes many investments out of scope for many people due to their complexity and the fact that the institutions that make risky loans can turn around and sell the risk to unsuspecting investors and have the investment vehicle rated as safe investments.

The popularity of gold investment, especially in growing economies such as India and China are a good reason why gold is holding its value and likely to go higher. Gold is also a hedge against economic risk, when currencies and other investments are under severe economic pressure.

Always perform your own due diligence and never pay more than 5-20% over the spot price of gold for gold bullion.


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