By Peter Mastrantuono
A store of value is any asset that can be easily stored and exchanged in the future without a loss in purchasing power. A store of value should have an enduring lifespan, be of limited supply, enjoy unlimited demand and be convertible. Ideally, it should also be portable and divisible into smaller units.
The motivation for owning a store of value is to protect wealth against a loss in value over time due to economic, political or environmental changes.
That’s the theory. Though assets such as land, art and collectibles, currencies, precious metals and, more recently, cryptocurrency are considered to be stores of value, in practice few meet the definition’s high bar.
Profiles in Stores of Value
Perhaps the most widely discussed stores of value are currencies, precious metals and cryptocurrency.
Currencies: Currencies are the dominant form of holding wealth; they are easily stored, universally accepted (with some exceptions) and divisible. Its most significant drawback as a store of value is that it doesn’t have a good record of maintaining purchasing power.
Take the U.S. dollar, the world’s currency reserve. However almighty the dollar may be, it has not been particularly good at retaining its purchasing power. For example, an item that cost $1 in 1950 would now cost $10.85—not a stellar performance of retaining value.
Currencies may be an adequate store of value in the short-term, but they are much less effective over the longer term.
Precious Metals: Precious metals, especially gold, have a good record of holding their value over time. Since before the Romans, gold has always been a dependable repository of value.
Gold offers many benefits as a store of value, including its historic record of acceptance, its storability, portability and its divisibility. And, unlike nations that can simply print more money, the supply of gold is limited. In fact, the supply of gold is likely to increase at an annualized rate of 2.5%, well below expected demand. Its limited supply may be the most compelling reason that gold will continue to be a store of value in the way it has been for over two thousand years.
Cryptocurrency: Cryptocurrencies, the most popular of which is bitcoin, are believed by many to be the store of value for the modern, digital economy. Bitcoin is durable, scarce, portable and easily divisible.
The verdict remains out on bitcoin and other cryptocurrencies. Skeptics argue that that it has no “first use” like gold, which makes gold’s value sustainable over time. (Supporters counter that bitcoin’s currency cum payment system is its value.)
Cryptocurrency has further challenges, not least of which is its extreme price volatility. Furthermore, while bitcoin’s supply is limited, nothing prevents “forking” into bitcoin cash or bitcoin gold or the creation of new cryptocurrencies—all of which may increase supply beyond demand and reduce its capacity to maintain its value.
Perhaps most troubling is that national governments, not happy to cede their currency leadership, could outlaw or restrict cryptocurrencies or simply create their own digital currency.
Choosing a Store of Value
Previous articles have explored the case for investing in currencies, gold and cryptocurrency—each an excellent primer on the topic, serving as a great background before sitting down with a financial advisor to understand in more detail which store of value best fits your needs and circumstances.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.
