Store of value
Encyclopedia
A recognized form of exchange can be a form of money
or currency
, a commodity
like gold
, or financial capital
. To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved.
Storage of value is one of several distinct functions of money
. The other functions are the standard of deferred payment
, which requires acceptability to parties owed a debt
, and the unit of account
, which requires fungibility
so accounts in any amount can be readily settled. It is also distinct from the medium of exchange
function which requires durability when used in trade and to minimize fraud opportunities.
With money being a storage of value was the start of monetary inflation cycles where the under and over abundance of market goods can lead to price instability.
Common alternatives that act as stores of value are:
While these items may be inconvenient to trade daily or store, and may vary in value
quite significantly, they rarely or never lose all value. This is the point of any store of value, to impose a natural risk management
simply due to inherent stable demand for the underlying asset. It need not be a capital asset
at all, merely have economic value that is not known to disappear even in the worst situation. In principle, this could be true of any industrial commodity, but gold and precious metals are generally favored because of their demand and rarity in nature, which reduces the risk of devaluation
associated with increased production and supply.
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
or currency
Currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
, a commodity
Commodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
like gold
Gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...
, or financial capital
Financial capital
Financial capital can refer to money used by entrepreneurs and businesses to buy what they need to make their products or provide their services or to that sector of the economy based on its operation, i.e. retail, corporate, investment banking, etc....
. To act as a store of value, these forms must be able to be saved and retrieved at a later time, and be predictably useful when retrieved.
Storage of value is one of several distinct functions of money
Money
Money is any object or record that is generally accepted as payment for goods and services and repayment of debts in a given country or socio-economic context. The main functions of money are distinguished as: a medium of exchange; a unit of account; a store of value; and, occasionally in the past,...
. The other functions are the standard of deferred payment
Standard of deferred payment
A standard of deferred payment is the accepted way, in a given market, to settle a debt – a unit in which debts are denominated. It is one of the defining functions of money; for example, while the gold standard reigned, gold or any currency convertible to gold at a fixed rate constituted such a...
, which requires acceptability to parties owed a debt
Debt
A debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
, and the unit of account
Unit of account
A unit of account is a standard monetary unit of measurement of value/cost of goods, services, or assets. It is one of three well-known functions of money. It lends meaning to profits, losses, liability, or assets....
, which requires fungibility
Fungibility
Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution, such as crude oil, wheat, precious metals or currencies...
so accounts in any amount can be readily settled. It is also distinct from the medium of exchange
Medium of exchange
A medium of exchange is an intermediary used in trade to avoid the inconveniences of a pure barter system.By contrast, as William Stanley Jevons argued, in a barter system there must be a coincidence of wants before two people can trade – one must want exactly what the other has to offer, when and...
function which requires durability when used in trade and to minimize fraud opportunities.
With money being a storage of value was the start of monetary inflation cycles where the under and over abundance of market goods can lead to price instability.
Common alternatives that act as stores of value are:
- real estateReal estateIn general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
- actual deeds in protectible land - goldGoldGold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...
- once the basis of the gold standardGold standardThe gold standard is a monetary system in which the standard economic unit of account is a fixed mass of gold. There are distinct kinds of gold standard... - silverSilverSilver is a metallic chemical element with the chemical symbol Ag and atomic number 47. A soft, white, lustrous transition metal, it has the highest electrical conductivity of any element and the highest thermal conductivity of any metal...
- once the basis of the silver standardSilver standardThe silver standard is a monetary system in which the standard economic unit of account is a fixed weight of silver. The silver specie standard was widespread from the fall of the Byzantine Empire until the 19th century... - precious stones, and precious metalPrecious metalA precious metal is a rare, naturally occurring metallic chemical element of high economic value.Chemically, the precious metals are less reactive than most elements, have high lustre, are softer or more ductile, and have higher melting points than other metals...
s - collectibles, e.g. original artArtArt is the product or process of deliberately arranging items in a way that influences and affects one or more of the senses, emotions, and intellect....
by a famous artist or antiquesAntiquesAn antique is an old collectible item. It is collected or desirable because of its age , beauty, rarity, condition, utility, personal emotional connection, and/or other unique features... - livestockLivestockLivestock refers to one or more domesticated animals raised in an agricultural setting to produce commodities such as food, fiber and labor. The term "livestock" as used in this article does not include poultry or farmed fish; however the inclusion of these, especially poultry, within the meaning...
(see African currencyAfrican currencyAfrican currency was originally formed from basic items, materials, animals and even people available in the locality to create a medium of exchange. This started to change from the 17th century onwards , as European colonial powers introduced their own monetary system into the countries they...
) - stockStockThe capital stock of a business entity represents the original capital paid into or invested in the business by its founders. It serves as a security for the creditors of a business since it cannot be withdrawn to the detriment of the creditors...
While these items may be inconvenient to trade daily or store, and may vary in value
Value (economics)
An economic value is the worth of a good or service as determined by the market.The economic value of a good or service has puzzled economists since the beginning of the discipline. First, economists tried to estimate the value of a good to an individual alone, and extend that definition to goods...
quite significantly, they rarely or never lose all value. This is the point of any store of value, to impose a natural risk management
Risk management
Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities...
simply due to inherent stable demand for the underlying asset. It need not be a capital asset
Capital asset
The term capital asset has three unrelated technical definitions, and is also used in a variety of non-technical ways.*In financial economics, it refers to any asset used to make money, as opposed to assets used for personal enjoyment or consumption...
at all, merely have economic value that is not known to disappear even in the worst situation. In principle, this could be true of any industrial commodity, but gold and precious metals are generally favored because of their demand and rarity in nature, which reduces the risk of devaluation
Devaluation
Devaluation is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged....
associated with increased production and supply.
See also
- AssetAssetIn financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
- Value networkValue networkA value network is a business analysis perspective that describes social and technical resources within and between businesses. The nodes in a value network represent people . The nodes are connected by interactions that represent tangible and intangible deliverables. These deliverables take the...
- Bretton Woods systemBretton Woods systemThe Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states in the mid 20th century...
- Full-reserve bankingFull-reserve bankingFull-reserve banking, also known as 100% reserve banking, is a banking practice in which the full amount of each depositor's funds are kept in reserve, as cash or other highly liquid assets...
- Gold as an investmentGold as an investmentOf all the precious metals, gold is the most popular as an investment. Investors generally buy gold as a hedge or harbor against economic, political, or social fiat currency crises...
- Great DepressionGreat DepressionThe Great Depression was a severe worldwide economic depression in the decade preceding World War II. The timing of the Great Depression varied across nations, but in most countries it started in about 1929 and lasted until the late 1930s or early 1940s...
- Official gold reservesOfficial gold reservesA gold reserve is the gold held by a central bank or nation intended as a store of value and as a guarantee to redeem promises to pay depositors, note holders , or trading peers, or to secure a currency....
- Silver as an investmentSilver as an investmentSilver, like other precious metals, may be used as an investment. For more than four thousand years, silver has been regarded as a form of money and store of value. However, since the end of the silver standard, silver has lost its role as legal tender in many developed countries such as the...
External links
- Linguistic and Commodity Exchanges by Elmer G. Wiens. Examines the structural differences between barter and monetary commodity exchanges and oral and written linguistic exchanges.