A store of value is any asset that retains its value over time. The ideal store of value would be one that has little risk and can be trusted to stay valuable well into the future.
One of the reasons that it’s important to understand the idea of a store of value is that cash always depreciates. Due to inflation, which central banks often try to keep at or around 2% per year, money loses purchasing power constantly. To see this in action, look at official Consumer Price Index (CPI ) numbers.
Store of Value Definition
A store of value will most appeal to those who have a low tolerance for risk. Store of value assets are defined as those that have a history of maintaining their value throughout time.
Speculative assets can produce tremendous returns but tend to be volatile and often come with high risk. Stores of value, on the other hand, tend to have lower volatility and lower risk, while often producing lower returns.
Store of value assets have a lot in common with safe haven assets, and sometimes the two are interchangeable. There are times when certain “safe-haven” assets can outperform many other sectors of the market, such as during times of volatility in the market when investors are fearful and seeking shelter.
Examples of Poor Stores of Value
A store of value definition wouldn’t be complete without considering what doesn’t work when it comes to retaining value.
As mentioned, fiat currency (national currencies created by central banks like the Federal Reserve) does not retain its value. Every year, the price of many goods and services rises relative to the dollar and other fiat currencies. Cash loses purchasing power steadily.
For most of history, low-risk bonds like U.S. Treasuries have been considered the holy grail of safe havens. There was a time not too long ago when government bonds were one of the best stores of value available.
But recently, something unprecedented has been going on in bond markets all over the world: negative interest rates. Japan, Germany and several other countries, many of which are in the European Union, have had negative interest rates for years now.
Never before in recorded history has there even been a discussion of interest rates going negative. What does it mean to have a negative interest rate?
It means that investors are 100% guaranteed to lose money. Why would anyone agree to this?
There are a number of theories. Investors might want to take a small guaranteed loss as opposed to having to deal with the uncertainty of a potentially much bigger loss. Or they might believe that at some point in the future interest rates and yields will have to rise.
One logical explanation could be that investors don’t plan on holding the bonds at all, but instead are buying them with the intention of selling them for a higher price at a later date (a bond’s price is the inverse of its yield, so if yields are going down, that means bond prices are going up).
Speculative stocks like penny stocks (stocks trading under $5 a share) are generally not considered to be good stores of value.
The value of a penny stock can rise or fall by a large amount very quickly and suddenly. Many even see their values drop to zero when a company goes bankrupt, causing shareholders to usually lose everything they had invested.
Shares of these stocks also tend to be highly volatile because of their low market caps, making it less certain whether they will hold their value during stormy periods in the equity market.
Most commodities don’t make for practical stores of value, even though some might remain valuable for a time.
In the past, during periods of scarcity, oil was considered by some as a good store of value. But crude oil’s value is really derived by supply and demand forces. It’s price can actually be quite volatile. For instance, during periods of economic uncertainty, investors anticipate demand for oil will dip as fewer people need to drive cars or send goods, driving down the price of crude.
More recently, fracking in the U.S. has also led to much more supply of oil, which has further pressured prices–making oil not a good store of value.
Agricultural commodities like corn, wheat, or soy are impractical for similar reasons. Commodity prices in general can be volatile depending on weather and what’s happening in the world.
Examples of Potential Stores of Value
There are several assets that can serve as a store of value. Which asset class serves this purpose best is a matter of constant debate within the investment community. Much of it comes down to an investor’s individual preference, as well as the market dynamics at the time.
Gold is perhaps the most tried-and-true store of value, with a history going back thousands of years. The yellow metal has a long track record of retaining its value against other forms of money. Throughout much of modern and ancient civilization, gold served as a universal form of money and was used as both a store of value and a currency.
Today, gold is generally considered a commodity, an inflation hedge, and a safe haven asset. During times of uncertainty, gold tends to perform well. During the coronavirus crisis of 2020, for example, gold reached a record in August amid unprecedented stimulus programs across the globe, negative real rates in the bond market and a falling U.S. dollar.
Silver and platinum are other precious metals that investors have turned to as a store of value.
Gemstones can serve as a store of value in much the same way that gold does. Some ultra-high net worth individuals might prefer stones like diamonds, rubies, emeralds, sapphires and others to gold because they might consider these rarer and easier to transport.
For instance, a million dollars’ worth of gold might require storing several large, heavy bars of metal. The same amount of money held in diamonds might fit in a small pouch.
Once considered a purely speculative asset, investing in bitcoin has increasingly been considered by some investors as a store of value. Some investors consider bitcoin to be a scarce commodity, because it’s supply is capped at 21 million. This is thought to be the one reason behind bitcoin’s meteoric rise over the last decade. In early 2021, bitcoin prices hit above $40,000, compared with $200 just five years earlier.
Bitcoin is also relatively liquid because cryptocurrency markets trade 24/7, and a growing number of merchants have begun accepting bitcoin as a form of direct payment.
Index funds and exchange-traded funds (ETFs) provide an easy way for investors to gain exposure to equity markets while getting automatic diversification.
Index funds in particular can be good stores of value because they attempt to track the performance of a market index over time. Historically, over longer time periods, financial markets have almost always gone up.
In short, a store of value is something that tends to maintain or increase its price over time. The law of supply and demand very much applies here, and in itself can be used to determine whether or not something might be a good store of value.
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