Bullion banks carry counterparty risk because they often sell more paper claims to gold and silver than they hold in physical metal. If many customers demand delivery at once, the bank may struggle to fulfill those requests, creating a form of default risk.
This system, sometimes called fractional reserve bullion banking, means investors in unallocated accounts don’t actually own specific metal, they hold a claim against the bank.
Other risks include counterparty failure or bankruptcy, limited transparency around reserve ratios, and exposure to broader financial system stress.
During periods of market panic, bullion banks could face liquidity crunches if obligations exceed available physical supply, leaving account holders with cash settlements instead of metal they expected.
