Inflation-proof assets: Understanding stores of value
How do we make sure that the value of what we own today doesn’t vanish tomorrow? This question isn’t just for economists—it’s something we all face. Whether it’s your savings, investments, or even your retirement fund, keeping their value steady over time is key to financial security. Without this stability, personal wealth can erode, economies can falter, and long-term plans may fall apart. In this blog, we’ll explore what makes a “store of value,” discuss examples like gold, currency, and cryptocurrency, highlight the risks involved, and look at how the concept is changing in today’s world.
What is a store of value?
A store of value is anything that holds its value over time without losing its purchasing power. In simpler terms, it’s an asset or item that you can rely on to retain its worth. People often think of gold, stable currencies, or even real estate as stores of value because they don’t lose value quickly, even during tough economic times.
The main idea behind a store of value is to protect your wealth. Unlike items like cars or electronic gadgets that lose value as they age, good stores of value maintain or even grow in worth. For instance, gold has been seen as a safe haven for centuries because it doesn’t corrode or go out of demand. On the other hand, paper money can lose its value quickly due to inflation or economic instability.
Inflation is one of the biggest threats to a store of value. It’s the slow erosion of purchasing power, where the same amount of money buys less over time. This is why people often look for assets that can keep up with or beat inflation, ensuring that their wealth doesn’t shrink.
Simply put, a store of value is about safeguarding the money or assets you’ve worked hard to earn, making sure they’re worth the same—or more—in the future.
Key features of a store of value
Durability
For something to act as a store of value, it must stand the test of time. Think about gold—it doesn’t rust, degrade, or wear out. This durability makes it a reliable option. In contrast, something like perishable goods—such as food or flowers—cannot serve as a store of value because they spoil quickly.
Stability
A strong store of value doesn’t see wild price swings. Stability means you can count on the asset holding steady during good times and bad. For example, a currency that fluctuates too much in value can’t be trusted as a store of value. That’s why countries with stable currencies, like the U.S. dollar or the Swiss franc, are often viewed as economic benchmarks.
Transferability
Good stores of value need to be easy to transfer or sell when needed. If you own gold or a stable cryptocurrency, you can usually find a buyer or a way to exchange it for something else of equal worth. On the other hand, some assets, like rare art, might hold value but aren’t as easily traded, making them less practical for most people.
Limited supply
Scarcity is what drives demand. Take diamonds or Bitcoin, for example—there’s only so much available, which is why their value tends to stay high. When something is too abundant, like paper money that can be printed endlessly, it risks losing value through inflation. A good store of value benefits from being finite, ensuring its worth remains intact.
Why stores of value are important in today’s economy
Role in savings and investment
A store of value is crucial for building and preserving wealth. When people save or invest their money, they want it to hold its value or grow over time. Without a reliable store of value, savings can erode due to inflation, and investments can become risky bets rather than stable assets.
Protection against inflation and economic uncertainty
Inflation slowly eats away at purchasing power, which means the same amount of money buys less over time. A strong store of value helps people guard against this by preserving their wealth, even during times of economic uncertainty. Gold, for instance, often gains popularity during financial crises because of its steady worth.
Enabler of intergenerational wealth transfer
Stores of value aren’t just for today—they’re also about securing the future. Assets like real estate, gold, or even certain currencies can be passed down to the next generation without significant loss in value. This allows families to build long-term wealth and maintain financial security over decades.
Popular examples of stores of value
Currency as a store of value
Currencies are one of the most common and practical stores of value. A strong, stable currency like the U.S. dollar helps people save, trade, and invest with confidence. However, not all currencies are equal. In economies with hyperinflation—such as Zimbabwe in the 2000s or Venezuela recently—money can lose value so quickly that it becomes worthless. This forces people to seek alternative stores of value like foreign currencies or commodities.
Precious metals
Gold, silver, and platinum have been trusted stores of value for centuries. Gold, in particular, is known as a “safe haven” asset because it holds value even during times of economic turmoil. Its durability, scarcity, and universal demand make it a favorite for investors. However, precious metals have their drawbacks, such as the cost of storage and the fact that they don’t generate income like stocks or bonds.
Cryptocurrencies
The rise of Bitcoin and other digital currencies has introduced a new type of store of value. Bitcoin, for instance, is often called “digital gold” because it has a limited supply and is decentralized, meaning no government controls it. While cryptocurrencies have potential, their high volatility makes them a risky choice for now. Still, as adoption grows and the market matures, they might play a bigger role in the future.
Tangible assets
Real estate is another popular store of value because it tends to appreciate over time and provides utility (people need places to live or work). Other tangible assets like art, collectibles, and rare items also serve as stores of value, though their niche appeal and lack of liquidity can limit their usefulness for everyday investors.
How inflation impacts the effectiveness of stores of value
The erosion of purchasing power
Inflation is like a slow leak in a tire—it might not seem like a big deal at first, but over time, it can cause major problems. For instance, if inflation is at 5%, your $100 today will only buy what $95 could a year ago. This is why people turn to stores of value that can keep up with or outpace inflation, like gold or real estate.
Historical examples
Hyperinflation offers extreme cases of inflation’s impact. Take Germany after World War I, when money became so worthless that people carried it in wheelbarrows to buy bread. In modern times, Venezuela’s hyperinflation has led people to abandon their local currency in favor of gold, dollars, or even Bitcoin. These examples show how vital stores of value become when traditional currencies fail.
Strategies to combat inflation
Diversifying your investments is one of the best ways to protect against inflation. By spreading money across assets like real estate, stocks, gold, and stable currencies, people can reduce their risk. Another strategy is choosing inflation-resistant stores of value—like assets tied to essential goods or services—that maintain demand regardless of economic conditions.
The evolving landscape of stores of value
The rise of digital assets
With technology advancing rapidly, digital assets like Bitcoin, Ethereum, and NFTs (non-fungible tokens) are shaking up the idea of what a store of value can be. Cryptocurrencies offer decentralized options, while NFTs add a layer of uniqueness and ownership to digital art and collectibles. However, both are still in their early stages and come with risks, such as market volatility and regulatory uncertainty.
Globalization and its effects
In today’s interconnected world, economic events in one country can ripple across the globe. This has made global commodities, like oil or rare minerals, more relevant as stores of value. It also means that people increasingly look for assets that aren’t tied to one specific economy, like gold or certain cryptocurrencies.
The challenges and risks with stores of value
Volatility and unpredictability
Not all stores of value are equally stable. Cryptocurrencies, for example, can see massive price swings within days, making them unreliable for short-term stability. Even traditional stores of value like real estate or gold can be affected by market forces, though they tend to stabilize over the long run.
Accessibility and cost
Some stores of value, like gold or real estate, come with high upfront costs or ongoing expenses (e.g., storage or maintenance). This can make them less accessible for the average person. Choosing the right store of value often involves balancing affordability, practicality, and long-term security.
Summing up
Choosing a store of value is about safeguarding your financial future. Whether it’s gold, cryptocurrency, or real estate, the right choice depends on your goals, risk tolerance, and market conditions. A strong store of value doesn’t just protect what you’ve earned—it ensures that your wealth can grow and adapt over time. So, what’s your strategy for keeping your wealth secure?
FAQs
How does a store of value differ from a medium of exchange?
A store of value retains purchasing power over time, allowing individuals to save and retrieve wealth in the future without significant loss. In contrast, a medium of exchange is an asset used to facilitate transactions for goods and services. While money often serves both functions, not all mediums of exchange are good stores of value, especially in times of high inflation.
Can real estate serve as a store of value?
Yes, real estate is commonly considered a store of value. Properties tend to appreciate over time, often outpacing inflation, making them a reliable means to preserve and grow wealth. However, real estate investments require significant capital and are less liquid compared to other assets like stocks or bonds.
What role do interest-bearing assets play as stores of value?
Interest-bearing assets, such as savings accounts, bonds, and certificates of deposit, not only preserve the principal amount but also generate income over time. This dual benefit makes them attractive stores of value, especially for conservative investors seeking steady returns.
How does liquidity affect an asset’s effectiveness as a store of value?
Liquidity refers to how quickly and easily an asset can be converted into cash without significantly affecting its price. Highly liquid assets, like publicly traded stocks or government bonds, are generally more effective stores of value because they can be readily sold in the market, providing flexibility to the holder.
Are collectibles and art reliable stores of value?
Collectibles and art can serve as stores of value, but their effectiveness depends on factors like rarity, demand, and market trends. While some items may appreciate significantly, others might not, making this category more speculative. Additionally, the market for such assets can be less liquid, posing challenges when attempting to sell them quickly.
