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Market Update July 29: Origin of Central Banks

Market Update July 29: Origin of Central Banks

August 18, 2020
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The presidential election is only 96 days away, protests have turned violent in several major cities across our country, and the Senate and the House are debating how to shape the next phase of coronavirus relief, including whether to extend or reduce the $600 weekly Federal unemployment benefit.

Parents are trying to adjust to their kid’s new school schedules as more and more schools opt in for a virtual classroom setting. Some communities are even reversing their decisions as more restrictions are being put on the community.

While protests continue, Attorney General William Barr stated, “these peaceful protests are being hijacked by a very hard core of instigators. In fact, police casualties far exceed anything on the civilian side.” Despite all of the worrisome news, the market continues to hold its recovery this week. Let’s revisit the first principles of how an economy works.

Money and Value

In previous weeks we discussed the source of value using units of water in the dessert. Each additional unit is valued on the next ranked desire. The more of a unit you have, the lower ranked desire, the lower price paid.  Value is based on “use valued” at the margin. The last unit sets the price for the economic good.

In this case, there is no specific thing that is money. Instead, tangible items that best capture these four criteria are used as money. Good money is durable, portable, divisible, and intrinsically valuable, or has a use value. And the origin of money comes from a barter economy as an individual notice that some commodities are more likely to embody these 4 characteristics than other commodities.

Good as Gold

Prices of both gold and silver spiked this past week.  Gold is easier to carry. Gold has significant value relative to its size since its rare. It also cannot decay as an element. Gold is more durable, portable, and divisible than any other commodity.

There have been innovations for the use of metal as a medium of exchange. Coins were branded standardizing purity and weight. Over time, a tipping point happened where the highest use value became a medium of exchange vs. jewelry.  So why does money have value? It has value because it had value yesterday and it foundationally is based on the use value in barter.

People have continuted to innovate on Aristotle’s four characterstics of money and transitioned us from gold coins towards paper money, and eventually central banking. Over time, goldsmiths became trustworthy and become banks. Each bank would compete for deposits by paying interest on the deposits and earning money by loaning out the excess gold. As the economic system continues to expand on its money supply, a fundamental solution must be found.

Our concern regarding the dollar continues to grow, moving into a downward trend. This is NOT the time to have high cash balances beyond your cash hub. This would create much higher inflation than what we anticipate.

Because of our concerns for the dollar and views on inflation risks of bonds and cash, we added exposure to gold miners to qualified accounts last week. Large Cap Growth slowed last week, but Mid Caps and Small Caps rallied our other overweight. In addition, gold is once again reasserting itself and made new all-time highs. And our technicals are slowing changing the make-up of our portfolios.

 

Follow GWS on YouTube

For the full video recap of the webinar on which this blog post is based, follow GWS on YouTube. (If a recent episode isn’t posted there yet, it’s still in compliance review). And be sure to tune in to our weekly Gatewood Wealth Solutions Market Webinar to hear updates on the current state of the market and economy. As always, we welcome you to share our broadcast links on social media or with your friends and family. They are more than welcome to listen in and learn our perspective on the market and the economy.

If you have any questions, please contact your Lead Advisor or any other member of our team.  We are here for you.

Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. All investing involves risk including the possible loss of principal. No strategy assures success or protects against loss. Dollar cost averaging involves continuous investment in securities regardless of fluctuation in price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

 

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