What Is a Store Of Value?
A store of value is an asset that maintains its value without depreciating. Gold and other metals are stores of value, as their shelf lives are essentially perpetual. Milk is a poor store of value because it will decay and become worthless.
For investors, Interest-bearing assets such as U.S. Treasury bonds (T-bonds), are good stores of value because they retain their value while generating income.
- A store of value is a physical commodity that maintains its value rather than depreciating.
- Gold and other precious metals are good stores of value because their shelf lives are essentially perpetual.
- A nation's currency must be a reasonable store of value for its economy to function smoothly.
Understanding the Store Of Value
A reasonably stable currency is essential to a healthy economy. A nation's money must be a credible store of value in order for its citizens to engage in labor and trade, save money, and spend it.
A monetary unit that serves poorly as a store of value destroys all incentive to save or even earn, and reduces the ability to trade. Thus, a reliable currency must be established for people to engage in labor and trade.
Many economies throughout history have used gold, silver, and other precious metals as currencies because of their ability to store value, their relative ease of transport, and the ease of exchanging them for different denominations.
The United States was on a gold standard, which meant that dollars were redeemable for a specific weight of gold, until 1971. President Richard Nixon ended dollar convertibility to give the Federal Reserve greater power to influence the rates of employment and inflation, among other factors.
Since then, the U.S. has used a fiat currency, which a government declares as legal tender but is not tied to a commodity of value.
Other Stores of Value
What comprises a store of value can be markedly different among countries and cultures. In most of the world's advanced economies, the local currency can be counted on as a store of value in all but the worst-case scenarios.
Stable currencies, such as the U.S. dollar, the Japanese yen, the Swiss franc, and the Singaporean dollar enhance their home economies greatly. They are resistant (although not immune) to hyperinflation.
Any physical asset may be considered a store of value under the right circumstances or when a base level of demand is believed to exist.
In those instances, other stores of value, such as gold, silver, real estate, and fine art have proved their worth over time. In particular, the price of gold will often skyrocket during times of national peril or when a financial shock hits the broad markets as the demand for other widely recognized stores of value grows.
While the relative value of such stores of value will fluctuate over time, they can be counted on to retain some value in almost any scenario. This is especially true if there is a finite supply of the store of value.