Commodities

store of value

What is a store of value?

A store of value is an asset, commodity or currency that retains its value without depreciating.

key takeaways

  • A store of value is an asset that retains its value rather than depreciating.
  • Gold and other precious metals are great stores of value because their shelf life is essentially permanent.
  • A country’s currency must be a reasonable store of value for its economy to function smoothly.

Understanding Store of Value

A store of value is essentially an asset, commodity or currency that can be saved, retrieved and exchanged in the future without depreciation. In other words, to get into this category, the acquired items should be worth the same or more over time.

Gold and other metals are stores of value because their shelf life is essentially permanent. For investors, interest-bearing assets such as U.S. Treasuries (T-bonds) also qualify because they retain their value while generating income.

Milk, on the other hand, is a poor store of value because it rots and becomes worthless.

Store of Value Example

currency

A reasonably stable currency is essential to a healthy economy. A nation’s currency must be a reliable store of value so that its citizens can work and trade, save and spend. A unit of currency used as a store of value destroys all incentives to save or even make money, and reduces the ability to transact.

precious metal

Many economies throughout history have used gold, silver, and other precious metals as currencies because of their ability to store value, relative ease of transportation, and ease of exchanging them for different denominations. In fact, until 1971, the U.S. was on the gold standard, which meant that U.S. dollars could be exchanged for a specific weight of gold.

President Richard Nixon ended dollar convertibility to give the Federal Reserve (Fed) more power to influence factors such as employment and inflation. Since then, the United States has used fiat currency, which the government has declared legal tender, but has nothing to do with valuable goods.

Any tangible asset can be considered a store of value under appropriate circumstances or when a basic level of demand is deemed to exist.

special attention items

What constitutes a store of value can vary significantly across countries and cultures. In most advanced economies around the world, local currencies can be considered a store of value in all but the worst-case scenarios.

Stable currencies such as the US dollar, Japanese yen, Swiss franc and Singapore dollar have greatly strengthened the domestic economy. They are resistant, though not immune, to hyperinflation.

In these cases, other stores of value, such as gold, silver, real estate, and fine art, have proven their worth over time. Gold prices tend to soar, especially when national crises or financial shocks hit the broader market, earning it a reputation as the ultimate safe haven.

While the relative value of such stores of value fluctuates over time, they can be expected to retain some value in almost any situation. This is especially true if the store of value has a limited supply.

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