One Myth About "Store of Value"

Some people call them "safe havens." Others call them "hedges." But mostly people refer to these as a "store of value."

I bring this up because "store of value" is a term often applied to cryptocurrency these days and is often used to define an advantage that crypto supposedly has over traditional fiat based investments.

Most of the time when we are talking about store of value we are of course talking about precious metals. Most notably, gold.

What largely propagates one's desire to move into precious metals (and perhaps crypto) is one simple thing. Fear. That is precisely what drives it. People move into a store of value investment when the economic news is bad and there is fear that the dollar or whatever currency you are using seems to be in some trouble.

Sometimes this move is made as well when things like the stock market or bond markets are not doing particularly well.

All kinds of things can influence the economy of course. Look at the news cycle today as an example. We have a messed up supply chain, a glut of unfilled jobs further adding to the difficulty of producing things and delivering them to market, rising inflation, weakening of purchasing power, the war going on in Ukraine—you name it. Right now it is virtually all gloom and doom.

I have personally never been interested in precious metals and I have always had what I feel is a strong reason for it. Even when the markets are bad and the economy is less than desirable. I still do not "run for the gold."

There is something I say often that pertains to this commentary, and that is that in order for something to generate true growth it must produce something. Or rather, something must be produced from it.

It is important to note that gold is not a "product" without "production." In other words, gold can produce things that create future value. But there is a difference between holding gold and using it to produce something.

Gold is actually a very valuable metal that is used for any number of good and profitable things. It is of course used to make jewelry, which is a multi-billion dollar industry. It is also used in electronics and in aerospace applications.

So, it is valuable.

But again, its value is only realized depending on what you do with the gold. A good analogy might be land. Land in and of itself is not particularly valuable. It is only when you improve the land and create an opportunity to produce something with it, that it becomes valuable.

What you produce also matters in determining the value. If you put a farm on it, it will produce X. If you put a retail store on it, it produces Y. And if you put a factory on it, it produces Z.

The land will always have value of course. But its value will also always depend on what's done with the land. The same applies to gold and other precious metals.

If you go to a gold broker and buy 100 ounces of gold, you will of course always have 100 ounces of gold. That factor never changes. You have 100 ounces of gold. Likewise, many in the cryptosphere will say the same thing. If you have 1 bitcoin you will always have 1 bitcoin.

That's their store of value argument just like it is the argument of those who believe in the store of value concept when it comes to precious metals.

But stepping back, the problem is that while that gold sits, it does not produce anything. And so its value is only derived from the price of an ounce of gold today, tomorrow, a year from now and 10 years from now.

Keep in mind as well that storing gold takes it out of the possibility of being used for something else. You could make the argument, "Well, this is a good thing because it reduces the supply and makes it more valuable." And there is some truth to that. But the extent to which the gold will increase in value due to some level of scarcity of "in-use" gold is ultimately limited.

In order for real value and real growth to be obtained the gold must be produced into something that has greater value than the gold itself.

In other words, the more gold that is used to make jewelry, electronics or used in the aerospace industry inherently makes the value of gold greater. Not the store of it. The store of it depresses the real value because when it is stored as opposed to used, no one can do anything with it to increase its value to the fullest potential.

If I own a piece of land that sits between two retail operations and I decide I don't want to put my own store on it, of course the value of my land will still rise because I have created a "scarcity" of sorts. Because two successful retail operations surround it, my land automatically has more value. But the value will always be limited to what it is worth before it is actually improved. If I build a store on it, suddenly the real value is unlocked to its fullest potential and there is no limit to the value that land can produce.

The one place that has forever and always been a real store of value? Equities. And hands down it has always produced results.

I have said it many times in this community that there is no greater creator of wealth than the stock market. That will always be true. Even in the world of crypto, even if crypto manages to replace fiat at some point, it will pale in comparison to the value of good businesses and the equities market they reside in.

There is no greater creator, hands down.

People "run for the gold" to try to beat the odds or preserve capital. It's a noble idea. But the reality is that what they actually do is create a massive missed opportunity.

There has always been bad news. There have always been catastrophic and alarming world events. There have always been moments of economic pandemonium and panic.

But the equities markets always come back and come back stronger than ever before. In other words, stocks pretty much always win.

So again, the real store of value is simply to remain invested in the stock market. Not to seek out "safe havens" that ultimately do not exist. Unless of course one is anticipating a complete collapse of the entire system.

But even that seems unlikely to ever become absolute since again, all you have to do to create value is to produce something. And regardless of anything else that happens, so long as there is something being produced something will have value regardless of any other factors underlying.

Warren Buffet illustrated this point much better than I ever would be able to when he made the comparison between two investment strategies in 1942, right at the time the U.S. was engulfed in WWII and things did not seem to be going particularly well at the time.

The war did not look good, the economy did not look good and so then, just like many times in the past, many people would be inclined to flock to gold to try to save themselves from disaster.

He pointed to a $10,000 investment and told the audience to think about how much that $10,000 would be worth today had the investor ignored the bad news and just kept his money invested in the stock market.

He of course made it a point to suggest that if all you did was invest $10,000 into the S&P 500 then, knowing absolutely nothing about stocks or even business, closed your eyes and never once did anything else with it, not even adding any money whatsoever to the initial $10,000—how much would it be worth today some 80 years later?

The answer? $51 million.

He then pointed to the investor who panicked and ran for the gold. That same $10,000 invested in gold would only be worth $450,000.

The moral to the story is that the investor who stayed the course fared much better than the guy who decided to go for the gold. Because the difference was that (in Warren's example) the guy stored 300 ounces of gold, 80 years later he still only had 300 ounces of gold. And while the value of gold did indeed rise, it never produced anything and therefore it never had the ability to grow in the same way that equities did.

Over that 80 year span the businesses that comprised the S&P 500 made things and sold things and generated profits and invented things and grew and expanded—and that is why that investment generated over $50 million more in value than the gold did.

I will leave you with one final question to ask yourself in closing. Let's now compare cryptocurrency to gold. Cryptocurrency actually has less of an actual use case ultimately than gold. Gold can be produced into something to give it greater value. What can cryptocurrency be made into to give it greater value?

More importantly, how can crypto ever be a true store of value if gold technically is not, considering that gold has far greater use than crypto does?

Even at gold's finest point, it was never able to even remotely achieve the results to the real value of equity. From 80 years to now to 80 years from now, the stock market will continue to be the best bet if anyone ever wants to achieve wealth.

That gold is a store of value seems to be false because more was lost by storing it than by avoiding it.

Lead image courtesy of Pixabay, user imsogabriel. Water Ripple Liquid - Free photo on Pixabay