What Is a Store Of Value?
A store of value is an asset that maintains its value without depreciating. Gold and other metals are good stores of value as their shelf lives are essentially perpetual, whereas a perishable item (milk, for example) is a poor store of value because of its propensity to decay. Interest-bearing assets, such as U.S. Treasury bonds (T-bonds), are very good stores of value because they generate interest income and their principal balances are backed by legal contracts.
- A store of value is an asset that maintains its value without depreciating.
- Gold and other precious metals are good stores of value because their shelf lives are essentially perpetual.
Understanding Store Of Value
Wealth preservation is a key component of a healthy economy, especially in its role of forming a currency or monetary unit. The economy relies on money to facilitate an exchange of goods and preserve the value of an individual or business's accumulated labor. A monetary unit that serves poorly as a store of value compromises an economy's savings and reduces its ability to trade. Thus, a credible 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 and their relative ease of transport, as well as the ease of forming them into different denominations. The United States was on a gold standard, in which dollars were redeemable for a specific weight of gold, until 1971. Then, President Richard Nixon ended dollar convertibility to give the Federal Reserve greater power to influence rates of employment and inflation, among other reasons. Since 1971, the United States has used a fiat currency, which a government declares as legal tender but is not tied to a physical commodity.
Other Stores of Value
What comprises a store of value can be markedly different between countries. 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. However, currency can sometimes come under attack as a store of value when hyperinflation occurs.
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 consistency 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 these items will fluctuate over time, they can be counted on to retain some value in almost any scenario, especially in those cases where the store of value is in finite supply, such as gold.