Store of Value

An asset, currency, or commodity would be considered a store of value if it maintained or slightly increased its value.

Suppose its value is stable or increases over time, can be stored, doesn't depreciate, and can be held, converted, and retrieved into money without losing its value. In that case, it is considered to be a store of value. 

For any item to enter into this category, it should, over time, either be worth the same or more.

Various commodities like gold and other precious metals are considered good stores of value. Gold and precious metals are divisible, durable, portable, and saleable. Even when an economic crisis hits, they are always in high demand and can easily be converted. 

Investment is also a good store of value that comes with an irredeemable lifespan and is in high demand by lowering its risk. For an economy to function smoothly, a nation’s currency must be a good store of value.

In modern days, the most common have been currency or a commodity such as a precious stones.

The concept behind it is Risk Management. Due to its continuous demand for underlying assets, the prices will be maintained. Gold and other metals are stores of value that are unchanging, due to their prolonged shelf life, without diminishing values.

It is essentially an asset, commodity, or currency that can be saved, retrieved, and exchanged while maintaining its value in the future without any risk of it diminishing.

Interest-bearing assets are considered qualified because they also generate income while maintaining value.

On the other hand, a dairy product is poor storage of value because it will perish and expire shortly within a given period of time.

Money as a Store of Value

The storage of value is a crucial function of money; it is a medium of exchange. In the ancient days, various commodities used to play the role of money. 

Trade agents used assets and commodities, such as gold, as a medium of exchange based on their values, durability, and portability. This was a kind of barter system utilized in common markets. 

In monetary economics, money is also considered, where it can be used as a means of savings. 

To cite an example, Rajesh worked today and earned $30. He can hold onto the money until he spends it because it has its value of $30 until the day he spends it.

Typically, money can hold value for a few years with minor changes. These changes are the results of changing inflation values. Holding cash is a more effective way to store value than corn or milk, which will eventually riot because it cannot hold up to that amount of period.

Medium of exchange is another function of money, which is widely accepted as a payment method. Even when you go for groceries, you are confident that the store will take your type of payment as it increases efficiencies and reduces delays.

It is a carrier of value between independent transactions. Since money is transferable from one period to another, it facilitates a transfer of purchasing power and is helpful for its durability. 

Large quantities of money are hoarded because of their store value. However, significant changes in prices reduce the value of money. In case of the rise of inflation, purchasing power reduces, and a cost is imposed on the holders of money. 

Individuals who earn more experience high inflation, so they prefer to spend their income quicker than saving it for the future, such as buying gold. When currency fails, it fails to function as money. Hence, it causes people to substitute cash from other countries.

History of the Store of Value

1. The Barter System

The oldest form of commerce where before the concept of money was introduced; people relied on the barter system - where goods are exchanged directly for other goods. 

Individuals and organizations barter goods and services based on estimated prices and goods.

Back then, cattle were currency: people used cattle for goods and services. However, cattle could grow sick or die in a short lifespan, and they were hard to transfer.

The easiest way in the barter system was commodities such as agricultural materials, metals, and services. But even they did not have a specified value, which led to rising issues with defining their exchange in value. 

2. Genesis Of Money

This is where society came up with the concept of coins. Initially, the provision of coins was limited by the availability of the metal itself, which meant they possessed real value.

When paper notes were introduced, the bank ensured that these too had real value by backing them with gold; because gold itself is scarce, the notes acted as a good store of value.

3. Watered Down Money

In 1971, the gold standard of banknotes was scrapped. In the new system, paper notes and coins had their value because everyone believed they did, but there was nothing intrinsic value backing them. 

Plus, governments could print these banknotes and add them to the overall supply.

In Germany, this resulted in the depreciation of the purchasing power of banknotes. As of now, the average annual inflation rate in the U.S. over the last five years has topped 1.86%. 

When it comes to developing countries, this case is worse, as inflation could vary from 5% to over a thousand percent.

However, some people still use savings accounts, where they store cash at the bank for a small percentage of the interest rate banks earn by lending it. But with interest rates always in competition with inflation, the rewards for using this kind of service are ever decreasing.

Examples of Store of Value

This article will delve into a list of the excellent and poor stores of value.

• Currency

A reasonably robust currency is essential for the well-being of the economy. An unstable store value can collapse the entire trading system to save or earn incentives.

A nation’s currency must be robust enough to facilitate labor, trade, savings, and expenditure for its citizens.

A system of banknotes or coins in everyday use within a specific environment over time, especially for people in a nation-state. With the advent of technology, the digital currency has risen enormously.

• Precious Metals

Throughout the ages, precious metals like gold, silver, platinum, and other metals were used by many economists for trading purposes because of their ability to store value, increased portability, and divisibility features. 

The United States was a gold standard country. This means it used gold to back its reserves so that any investor could redeem their dollars for any amount of gold until 1971.

By the end of the 90s, the gold standard concept gave the Federal Reserve (Fed) greater power to influence macro factors such as inflation, unemployment rates, and economic outputs.

 Since then, the U.S. introduced a fiat currency, a legal tender issued by the government but is not bound to a commodity of value.

• Cryptocurrency

Cryptocurrency investors have given insight towards crypto investments such as Bitcoin, stating these items to be great stores of value. Its features include divisibility, scarcity, a decentralized security network, and a holder of transfer of value. 

Some investors thought it would be a scarce commodity because its supply was limited to 21 million, which led to a sudden rise over decades. Compared to just five years, when bitcoin in 2016 was $2000, and in 2021, its price hit $40,000.

• Gemstones

In the same way as precious metals, a gemstone (can be a fine gem, or jewel, a semiprecious stone) is considered the best store of value. 

This is because gemstones are easy to transport and are often rare. Some high-net-worth individuals prefer to buy stones like diamonds and jewels, while others prefer gold and metals.

Examples of Poor Stores of Value

• Bonds

Treasury bonds (T-bonds) are long-term government debt security issued by the U.S. Federal department with a fixed rate of return whose maturity lies between 10-30 years.

In the recent past, government bonds were known to be effective storers of value, but due to current events in the stock and securities markets along with declining interest rates, bonds are no longer strong stores of value.

In this current case, investors are more likely to lose their money. A bond's price is the inverse of its yield, so if yields are going down, bond prices are going up.

• Cash

The fiat currency of the Federal Reserve created by the central bank doesn't retain its value. Every year, the prices of many goods and services grow concerning the dollar and other fiat currencies from inflation and various factors. Hence, cash loses its purchasing power frequently. 

• Commodities

Oil was said to be one of the good stores of value during times of scarcity in the past. Some individuals believed due to low oil supply and high demand, the value of oil would stabilize or increase over time. 

When it comes to the case of crude oil, both supply and demand increased, but the prices were deteriorating. When economic uncertainties came, the investors said the demand for oil prices would reduce because fewer people would drive cars and send goods. 

More recently, fracking in the U.S. has also led to much more oil supply, which has further pressured prices–making oil depreciate in value.

On the other hand, agriculture is unsuitable for specific reasons - such as poor quality of seeds, inadequate threshing technique or grading, and dairy products cannot stay too long. Hence, in general, commodity prices can be volatile depending on the weather and what’s happening in the world.

• Speculative Stocks

Speculative stocks are highly volatile and can rise instantly or fall dramatically for a significant amount. When a company goes bankrupt, many see its value drops to zero, causing shareholders to lose everything they invested in.

Researched and authored by Savan Sabu | LinkedIn

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Book Value Per Share (BVPS)
• Enterprise Value (EV)
• Free Cash Flow (FCF)
• Market to Book Ratio
• NOPAT