A Tale of Two Liquidities: China vs the West

As global liquidity in real terms continues to increase, the split between East and West continues to widen.

Western central banks such as the US Fed, European Central Bank and Bank of England have all been withdrawing liquidity, while eastern central banks, led by the People's Bank of China, are expanding it. That is driving the increase in the headline global liquidity number. However, eastern and western liquidity flows into different assets, which is why focusing purely on the headline figure is not enough for investors. A qualitative breakdown of global liquidity is more important than ever as these policy divergences play out.

And these divergences are not minor. Over the past 12 months, emerging market central banks have added about US$588 billion, while western central banks have pulled back US$322 billion. The global figure is being largely supported by China.

Chinese liquidity does not find its way into Bitcoin, which is banned, or foreign exchange, which is limited. Instead, it flows primarily into gold, which is both unrestricted and encouraged.

That is highly supportive for precious metals markets, but the rising headline number can be deceptive for Bitcoin and broader risk asset investors, who may be scratching their heads at higher global liquidity alongside weaker prices.

For gold investors, it is important to note that while the prior week saw a sharp pullback in liquidity from the People's Bank of China, this was seasonal rather than structural, and the underlying policy stance remains aggressively expansionary.

China is using newly created money to absorb bad debts in its banking system and property sector, a process that helps maintain domestic financial stability while channelling a significant portion of that liquidity into gold purchases, both by the central bank itself and by private buyers through the Shanghai Gold Exchange.

Meanwhile, western liquidity is being driven largely by the US Treasury issuing debt and spending the proceeds directly into the economy. Unlike traditional liquidity increases, which have typically resulted from central bank bond buying, this environment is not especially supportive of risk assets either. That could change quickly. As unemployment steadily rises and inflation falls away, a deflationary bust in a recessionary environment could force the Fed into action with a more traditional and supportive round of quantitative easing.

Bond market volatility has also increased recently, with the MOVE Index jumping from 73 to 81. That makes debt more expensive, as the collateral behind it becomes less stable and requires a greater haircut due to higher risk premiums. This is another sign of a weaker tailwind for western liquidity.

Gold at $5,172 per ounce has pulled back modestly from its $5,280 record, but it continues to hold its broader structural uptrend. Central banks, led by China but increasingly joined by other emerging market and Middle Eastern nations, are buying gold not because they expect higher prices, but because they need reserve assets with no counterparty risk.

Silver at $84 per ounce has corrected from its $96 peak, but remains dramatically elevated from the mid-$30s where this move began.

The gold-to-silver ratio has widened back to 61 from its compressed low of 56, but remains well below the 91 extreme that signalled silver's centennial undervaluation.

Silver is both an industrial commodity, essential for solar panels, electronics and military applications, and a monetary metal with thousands of years of history as money. Physical inventories are at multi-decade lows.

When available supply is this tight, corrections are opportunities for the structural bid to accumulate. Price discovery is now tracking necessity rather than narrative.

With PBoC injections hitting a trillion in 2025, projections show another trillion likely this year.

With Chinese liquidity flowing into gold reserves, domestic infrastructure and the real economy, the eastern bid underpinning precious metals markets shows no sign of slowing through to the end of this decade.