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Thursday, May 13, 2010

Store of Value

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.

1. 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.

2. Common alternatives that act as stores of value are:

* real estate - actual deeds in protectible land
* gold - once the basis of the gold standard
* silver - once the basis of the silver standard
* precious stones, and precious metals
* collectibles, e.g. original art by a famous artist or antiques
* livestock (see African currency)
* stock

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.

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