Understanding the Core of a Store of Value
A store of value is fundamentally an asset, commodity, or currency that can be saved, retrieved, and exchanged in the future without losing its value. Essentially, for an asset to be categorized as a store of value, it should maintain the same worth or appreciate over time.
Gold and other precious metals serve as quintessential stores of value due to their virtually limitless shelf lives. In the context of investments, interest-bearing assets like U.S. Treasury bonds also qualify as they preserve value while generating a steady income.
In contrast, perishable items, such as milk, are poor stores of value because they degrade and become valueless over time.
Examples of Store of Value
Currency
A stable currency is vital for the smooth functioning of any economy. For citizens to effectively engage in work, trade, save, and spend, the national currency must be a reliable store of value. A problematic currency, which rapidly depreciates, undermines the incentive to save or earn, thereby limiting trade and economic stability.
Precious Metals
Throughout history, economies have turned to gold, silver, and other precious metals as their currencies due to their excellent ability to retain value, ease of transport, and convenience of exchange. The United States adhered to a gold standard until 1971, which allowed dollar redemption for a specified gold weight. This ended when President Richard Nixon sought to grant the Federal Reserve enhanced control over economic factors like employment rates and inflation, thereby paving the way for a fiat currency system.
Today, a government-backed fiat currency is no longer tethered to physical commodities. However, precious metals remain valuable assets under appropriate circumstances or when demand persists.
Special Considerations
Countries and cultures may vary greatly in what they consider a store of value. In advanced economies, the local currency generally serves as a dependable store of value except under extreme conditions. Stable currencies like the U.S. dollar, Japanese yen, Swiss franc, and Singaporean dollar significantly bolster their domestic economies, standing strong against challenges like hyperinflation.
During financial crises or periods of national instability, other stores of value, such as gold, silver, real estate, and fine art, prove their worth. For instance, gold prices typically surge during economic downturns, establishing its role as a trusted safe haven.
While the relative value of assets considered stores of value may fluctuate, these items typically retain some level of worth in virtually any scenario. This is particularly true for assets with a finite supply.
Related Terms: asset, depreciation, commodity, currency, interest-bearing assets, fiat currency, hyperinflation, safe haven.
