A store of value is anything that can be stored away and later reclaimed without losing value. For a strong store of value investment, there is no need to be concerned about the ultimate depletion of value or the lack of demand. Continue reading to learn all you need to know.
What is a Store of Value?
A “store of value” is a thing, money, or commodity that holds its value over time. A “store of value” is a thing that maintains or even increases in value over time without degrading.
A good store of value is defined as an object that may be retained and traded for money at a later date without losing value. Because of their fragmentability, durability, and transportability, a number of commodities can be used to store value.
Understanding Store of Value
A store of value is essentially any item, money, or commodity that can be reliably transferred to another at a later time. The ability of anything to be held, retrieved, and exchanged while retaining its purchasing power decides whether or not it is a store of value.
The main concept behind a store of value is risk aversion, and prices will be sustained as long as there is steady demand for the underlying object. Gold and other precious metals, for example, are regarded as significant wealth repositories because their value does not depreciate over time.
Interest-bearing assets also qualify as wealth repositories since they generate income while maintaining value. A commodity, on the other hand, such as milk, is a bad savings vehicle since it degrades fast and loses value over time.
Historical Stores of Value
The Barter System
Before the concept of money was even invented, the barter system was practiced. Cattle were once used as currency to purchase goods and services. However, they were difficult to transport and may develop unwell or die in a short period of time.
Commodities such as food, metals, and services appeared to be the greatest solution. Even these, however, were difficult to nail down in terms of trade value since they lacked a definite number.
The genesis of money
Around that period, humans invented monetary coins. Coins used to be valued because their manufacturing was limited by the supply of metal.
When paper notes were finally introduced, the banking system ensured that they, too, had real value by backing them with gold; because gold is a valuable commodity, the notes acted as a fair store of value.
And watered down money
The gold standard was abandoned in 1971 as a result of this resistance. The only thing that gave paper notes and coins their value in this new monetary system was people’s confidence in them.
Furthermore, governments may print new banknotes whenever they choose, increasing the total quantity.
As a result, your currency’s purchasing power falls, as it did in Germany. Based on statistics from the last five years, inflation in the United States presently surpasses 1.86% each year on average.
The scenario becomes considerably more perilous when we examine emerging nations, where the ratio might vary from 5% to 1,000% or more.
Some people, however, continue to utilize savings accounts, where they deposit money in exchange for a percentage of the interest generated by the bank on loans made with that money.
However, because interest rates are always battling with inflation, the benefits of using this service are always declining. What alternatives are available because money appears to be a poor tool of conserving wealth?
Examples of Poor Stores of Value
One cannot provide a complete definition of “store of value” without mentioning the items that do not qualify.
Other than gold and silver, items other than gold and silver were used as money for most of human history. Because of their intrinsic worth, durability, and mobility, assets and commodities such as gold were used as mediums of exchange in the early days of trade.
Money’s defining feature is that it acts as a means of exchange for goods and services all throughout the world.
Money serves as both a means of commerce and a vehicle of saving and investment in a monetary economy. Money is important for long-distance economic transactions because of its capacity to retain buying power.
Money also has the property of being utilized as a medium of exchange, which means that it conveys a value from one transaction to another. Money is useful for holding value since it may be used to make purchases at various times.
People can conserve value in a variety of ways, including keeping money in their pockets until they need to make a transaction. Furthermore, the concept of a store of value encourages the deferral of satisfaction in order to collect resources for future use.
Money is frequently stored in huge sums due to its capacity to hold value. Money, on the other hand, might lose its worth as a store of wealth if prices vary significantly.
Consumers have less purchasing power when inflation is strong, and money holders must pay a greater price to keep their capital in circulation.
Low-risk bonds, such as US Treasuries, have been seen as a cure throughout much of human history. Government bonds were once seen to be one of the safest long-term investments.
However, something unique has recently occurred in bond markets throughout the world: negative interest rates. Negative interest rates have been in existence in Japan, Germany, and a number of other countries, including those in the European Union, for many years.
Negative interest rates have never been contemplated, let alone implemented, in human history. When do interest rates go negative?
This implies that any funds invested will be forfeited. I can’t believe anyone would agree to this.
Several theories have been advanced. Rather of accepting the danger of a much higher loss, investors may prefer to take a lesser guaranteed loss. Alternatively, they may expect yields and interest rates to rise in the near future.
Because the price of a bond is the inverse of its yield, an increase in bond prices shows that investors expect yields to decline, implying that they intend to sell their bonds at a profit in the future.
As a general rule, investing in extremely volatile equities such as penny stocks (those trading for less than $5 a share) is not a good idea.
A sudden and unexpected surge or decline in the value of a penny stock might occur. When a company declares bankruptcy, the value of many of its shares plummets to nothing, and shareholders typically lose all they invested.
Furthermore, the small market capitalization of these companies makes it difficult to predict whether or not their shares will retain their value during periods of market volatility.
Although many commodities may hold their value for a period of time, they are rarely ideal as long-term investments.
Oil was formerly seen to be a reliable item to hold in times of scarcity. The price of crude oil, on the other hand, is decided by market forces of supply and demand.
Its pricing is extremely volatile. For example, the price of crude oil is expected to reduce during times of economic uncertainty since fewer people are expected to drive or move goods.
Recently, fracking in the United States has resulted in significantly increased production of oil, further pressuring prices and rendering oil unsuitable as a store of wealth.
Transporting agricultural items such as corn, wheat, or soy is also impractical for the same reasons. Weather and global events have the potential to have a big influence on commodities prices.
Examples of Potential Stores of Value
Savings accounts can be made up of a variety of assets. The optimal asset class for this purpose is a point of contention among financial professionals. Much relies on the investor’s own tastes as well as the situation of the market.
Gold has been used as money for thousands of years, making it one of the most dependable forms of investment. Gold’s value has traditionally outperformed other currencies. For the great majority of human history, both in the present and in the past, gold has been used as a money and a store of value.
Gold is one of the most dependable ways to store wealth.
In today’s financial markets, gold is a commodity, an inflation hedge, and a safe haven asset. Gold is a stable asset that performs well in tumultuous markets.
For example, during the 2020 coronavirus outbreak, gold reached an all-time high in August as a result of exceptional global stimulus measures, negative real rates in the bond market, and a weakening US dollar.
Silver and platinum have also been used by investors to secure their money.
Gemstones, like gold, can be considered a safe refuge for financial investments. Because of their scarcity and mobility, diamonds, rubies, emeralds, sapphires, and other valuable stones may be preferred above gold by certain exceedingly affluent people.
Keeping a million dollars’ worth of gold, for example, may demand a large number of heavy bars. If you wanted to keep the same amount of money in diamonds, you could probably do it in a pocketbook.
Some people now see speculative investments in bitcoin as a way to preserve money. Given that only 21 million Bitcoin can ever be generated, some investors regard the cryptocurrency as a rare item.
This is commonly recognized as the sole driving element behind bitcoin’s meteoric rise over the last decade. In early 2021, the price of a bitcoin surpassed $40,000, up from less than $200 just five years before.
Because cryptocurrency exchanges are open 24 hours a day and more and more companies accept bitcoin as payment, the cryptocurrency is getting more liquid.
ETFs and index funds make it simple for investors to have access to the stock markets while also providing automated diversification.
Because index funds seek to match the performance of a market index, they can be a reliable long-term investment. Financial markets have virtually always increased over extended periods of time.
What makes a good store of value?
Let’s look at some potential instances of improper ways to store value to discover what features a good one should have. It seems to reason that if we want anything to last a long time, it must be strong.
Consider where your food comes from. Fruits like apples and bananas have some value on their own since humans require nourishment to exist.
In times of food shortage, these items would surely be quite important. Even so, they are not a dependable investment. Their worth will inevitably drop if they are locked up for years.
What about the prospect of long-term value? What about some dried pasta? While this is desirable in the near term, it may not be worth much in the long run. Pasta may be mass-produced at a minimal cost using plentiful ingredients.
Because more pasta can be created and put on the market with ease, the present supply will ultimately lose value. As a result, something must be scarce in order to retain its value over time.
Fiat currencies (such as the US dollar, Euro, or Japanese yen) are thought to be a safe haven for saving because of their long-term value stability.
However, when more units are manufactured, their purchasing power plummets substantially, making them poor long-term investments (just like the pasta).
Your life savings may be withdrawn and buried beneath the mattress for the next twenty years, but when you choose to utilize them, they will be worth less.
One hundred thousand bucks would have gone a lot farther in 2000 than it does now. The fundamental source of this phenomena is an increase in the general price of consumer goods and services.
Inflation is frequently caused by governments issuing too much money, resulting in an overabundance of fiat currency.
Consider this scenario: you possess $25.0 billion out of a total of $1000.0 billion. After some time has passed, the government decides to print an additional $800 billion in money in an attempt to revive the economy.
Your previous percentage of the pie has now decreased to 3%. Because there is more money flying about, it goes to reason that your piece isn’t worth as much as it formerly was.
Dollars, like the spaghetti we cooked earlier, are simply manufactured. All of the above is feasible in a few of days. Because of the high value of storage space, it is difficult to flood the market with new devices. That is, you should observe a minimal or insignificant decline in your pie share.
The amount of gold, for example, is limited. We are also aware that mining is a difficult profession. As a result, meeting a sudden spike in demand for gold is not as simple as turning on a printer.
It must be extracted from the soil, as is customary. There is a growth in demand, but supply cannot be raised substantially to match it.
Other popular commodities
Gold and silver are two commodities that may be used to hedge against inflation. However, it is difficult to physically keep or move gold or silver. It’s also difficult to divide these expenses into reasonable portions for daily expenditures.
Similar arguments may be made for property investing. Real estate investments are not only difficult to divide into reasonable parts, but also need a large outlay of capital all at once, putting them out of reach for the great bulk of the people.
While gold and silver, and to a lesser extent real estate, are effective long-term wealth vaults, their bulk and weight make them unworkable as day-to-day money.
This brings us to stocks and bonds, two of today’s most popular long-term asset storage vehicles. They are readily moved and endure a long time, but their returns frequently fall short of the rate of inflation.
By letting someone else keep and handle these assets for you, you also expose your money to possible loss.
Despite these challenges, cryptocurrency appear as a top choice for future wealth storage.
What makes a safe haven varies greatly among areas and cultures. Even under the worst-case situation, the local currency in the majority of the world’s advanced countries is a reliable store of value.
They profit greatly from adopting stable currencies such as the US dollar, Japanese yen, Swiss franc, and Singaporean dollar. They do not, however, fall completely to hyperinflation.
Gold, silver, real estate, and works of art are all examples of alternate kinds of wealth that have shown their worth over time. Gold, in particular, has a reputation as the ultimate safe haven, with its price rising when the country is in danger or when a financial shock hits the global markets.’
The value of such assets will fluctuate over time, but you can always count on them to be valuable in some manner. This is especially true in the case of a rare product used as money.
A “store of value” is anything that has value both now and in the future. Money is one such example; as long as its value is stable, it may be freely traded for other products and services and retained by individuals with assurance that their investment will not lose value.
The value may fluctuate over time owing to a number of factors such as market volatility, although absolute depreciation would need exceedingly exceptional circumstances.
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