Transcription
If you track PBOC liquidity with the gold price, it almost matches one for one. This is gold measured in RMB yuan on the right-hand scale in orange. The black is PBOC liquidity. And what you can see is as the PBOC injected huge amounts of liquidity into the Chinese system, Chinese residents needed monetary inflation hedges. They were buying gold furiously, hence the Shanghai Gold Exchange has been the marginal price of gold worldwide, eclipsing COMEX and London. And that is the story on gold. There has not been a great debasement as many journalists have been arguing. There's been a selective debasement. The great debasement is still to come, and that is because of the future debt problem of the West, America and Europe. The current debt problem with China is why we've had a gold market surging already.
Michael Howell, founder and managing director of GL Indexes, argues that liquidity remains the most important driver of financial markets. His analysis suggests that changes in central bank balance sheets and money market conditions explain much of the movement in major assets, particularly gold. Instead of viewing recent gains in precious metals as evidence of broad global currency weakness, he believes investors should distinguish between regional liquidity cycles and the much larger debt challenges that are still developing across advanced economies. One of the strongest relationships highlighted in his research is between liquidity provided by the People's Bank of China and the gold price measured in Chinese yuan. As Chinese authorities expanded liquidity to support the domestic economy, households and investors increasingly turned to gold as protection against monetary expansion. This surge in demand strengthened the influence of the Shanghai Gold Exchange, which Howell believes has become an increasingly important force in determining global gold prices alongside traditional trading centers in New York and London. This pattern leads to an important distinction. Howell argues that the world has not yet experienced a universal currency debasement. Instead, the current gold rally has reflected selective monetary expansion, particularly within China. The larger wave of currency pressure, in his view, could emerge later as Western governments struggle with rising debt burdens and refinancing needs. China's current liquidity cycle therefore provides a preview of how precious metals may respond when similar pressures appear elsewhere. Recent market developments suggest that Chinese liquidity growth has begun slowing after reaching elevated levels during late 2025. Liquidity is still expanding in absolute terms, but the pace of growth has weakened. If you found this analysis helpful, don't forget to like the video, subscribe to the channel, and share it with fellow investors. We'll continue bringing you insightful analysis. Thanks for watching.
I think the Iran tensions have had some localized effects, and I'm clearly not. It almost goes without saying, but it's actually had a somewhat complicated effect on China, and the response to the policy response that the PBOC, the Chinese Central Bank, has been undertaking. I mean, we can dig into that later, but broadly speaking, I mean, what we're seeing is liquidity having peaked in late 2025, and liquidity has been slowing down. I mean, I'm not going to say that liquidity is falling in absolute dollar terms. That clearly is incorrect. But it's slowing down, and that really matters in markets because liquidity is the marginal price of assets. And the reason it's falling is not because the Fed is stamping on the brake yet. I mean, Kevin Warsh has hinted he may have to do that. It's much more because the real economy is so strong. And this shows over the very long term, the ratio between an ounce of gold and a barrel of oil has been constant, near constant at about 20 times. So, back in 1970, gold was 35 bucks an ounce, oil was two and a quarter dollars a barrel, 20 times. 1990, 400 versus 200. 2015, 1,000 versus 50. 2022, 2,000 versus 100. Uh that's the 20 times. So, if you look at where we are now, uh we're up at around 40. Actually, we're we're uh slightly above that now because gold has fallen and oil has sort of stabilized. So, what we're looking at is probably about a 45 uh uh or so level. But, what you can see is that that ratio mean reverts. Now, if you hold that thought and say, "What is price?" Um we think uh probably well, I mean, maybe not unreasonably that gold is going to be elevated in the medium term because of all this debasement, either current or future, and therefore, let's take as a minimum $4,000 an ounce of gold. If you believe that 20 times is the ratio that you've got to start factoring in here for the gold oil ratio, simple math says that $200 a barrel of oil. Oil looks very, very cheap against other commodities, and it looks cheap against gold. Now, I'm not necessarily saying that 200 is a prediction or a forecast, but I'm saying this is the triangulation that comes out of it. And what you've got to expect uh is uh either you get $200 a barrel, the gold price collapses, or the oil gold ratio must climb. It's one of those three factors. The gold oil ratio is a technical coefficient that must relate to the underlying cost of extraction of these commodities, and therefore, that doesn't change very often. Um the gold price is something that is determined by the market and by monetization, which leaves the oil price as a residual. And therefore, that's a question that one we've got to ask. Oil is weak near near term, sure. I'll come quietly. That was not a great surprise. But, the it's the medium term that matters. And if you put this into context, which is why I showed that earlier chart on liquidity, this is the gold oil ratio plotted on top of the global liquidity cycle. Now, if you believe that markets go in cycles, some people do, some people don't. I'm a believer that they do follow broad cycles. What this shows is that the gold oil ratio tends to move with the liquidity cycle. Interestingly, it goes up sharply at the beginning of the cycle. Why? Because the gold price goes up. Uh liquidity drives gold higher. And then at the end of the cycle, the gold oil ratio comes down. Why? Because demand for uh demand for energy and demand for commodities is so strong from the real economy, and liquidity is principally going down at that stage because the real economy has got such a big appetite, it's crowding out financial markets. And therefore, what you see is the gold oil ratio coming down. Uh PBOC liquidity with the gold price, it almost matches one-for-one. This is gold measured in and RMB yuan uh on the right-hand scale in orange. The black is PBOC liquidity. And what you can see is as the PBOC injected huge amounts of liquidity into the Chinese system, Chinese residents needed monetary inflation hedges, they were buying gold furiously, hence the Shanghai uh gold exchange has been the marginal pricer of uh gold worldwide, eclipsing COMEX and London. And [clears throat] that is the story on gold. There's not been a great debasement as many journalists have been arguing. There's been a selective debasement. The great debasement is still to come, uh and that is because of the future debt problem of the West, America and Europe. Uh the current debt problem of China is why we've had a gold market surging already. Uh this gives us a taste of what could happen, of course.
He also points to stronger real economic activity as another reason why financial markets may face pressure. Money flowing into business investment, production, and commercial activity is no longer flowing into financial assets. This shift can weaken demand for investments such as gold, Bitcoin, and equities while flattening the yield curve. Rather than representing financial stress alone, these developments may reflect capital being absorbed by the real economy instead of speculative markets. Attention is also focused on the United States, where Federal Reserve liquidity management has become increasingly active since the sharp tightening cycle that followed the pandemic stimulus. After extraordinary liquidity injections during the COVID period, policy makers gradually reduced monetary support before responding to growing pressure in funding markets during late 2025. Temporary liquidity programs helped stabilize repo markets, but Howe believes underlying liquidity conditions continue moving toward gradual tightening despite those interventions. This outlook carries broader implications for financial assets. Howe recalls that during the 2021 and 2022 tightening cycle, equity markets experienced meaningful declines while Bitcoin suffered much larger losses. Although he expects policy makers to avoid aggressive tightening in the near term, he believes liquidity conditions could become more restrictive over time, creating greater challenges for risk assets if economic strength continues drawing capital away from financial markets. Let's get back to the video.
If that's the case, that's absolutely true. I I won't I won't deny that. I think that that that could be what's happening right now. There's a There's a good argument for that because many central banks are starting to turn towards tightening on top of as I say strong demand for liquidity from the real economy. And the point there is that all money that is anywhere must be somewhere. So, if it's in the real economy, it's not in financial markets. But, financial prices are suffering. Hence, the fact that Bitcoin and gold are going down, and hence the fact that the yield curve is flattening. These are all symptoms of that particular process. And that would tell us that you got to have a warning there for what's going to happen to Wall Street because Wall Street won't be immune from from these events. One's got to put this in context, and there's often a sequence in asset price moves. This is why we're concerned. Well, what happened in 2021-22 when the Fed tightened was that Wall Street fell 25% and Bitcoin went down 75%. So, you can see the impact of this could have.
[clears throat] Do the federal authorities want that to happen? Probably not. My view through this year, I mean rightly or wrongly, we're halfway through is that what you'd see from Wall Street in 2026 would broadly speaking be a range-bound market. There'd be volatility, but it would really go sideways because the authorities wouldn't be tightening that aggressively. And I think that's still the case. But I think as we roll the clock on, the odds are that liquidity conditions are going to tighten more and more and more and that that projection becomes, you know, maybe challenged by year-end or into 27. Well, when you get that confluence, it becomes it becomes the whole thing begins to compound in a nasty way. Debt grows exponentially and that's really the problem. And what you're getting increasingly, not just in the US but globally, is that policy makers are funding their deficits at the front end of the market. They're issuing a lot more bills. I mean, clearly the US has gone to an extreme in that sense, but they're doing short-term funding. And the question to ask everyone's got to ask is who buys that debt? And the answer is it's the banks. The banks love short duration debt. They buy it. But that's called monetization. Monetization, we know from history, is not a good thing because it leads to ultimately mainstream inflation. And, you know, the arch monetarist Milton Friedman would be turning in his grave looking at some of these some of these data. Let me let me try and show you what what's going on in markets. Maybe the first thing to do is to look at this. This is looking at the growth of Fed liquidity. This is, in other words, the growth rate of the pool of cash that the Fed is injecting into money markets. And you can see some of the background here in terms of the annotations. The orange line is looking at a rate of growth. You can see what happened immediately after the the COVID crisis when Fed liquidity growth was stunningly high at you know, rates of peaking at over 80 80% uh 6-month annualized clip, and then we start to see a very significant tightening, and you can see the wave that's followed since then, uh the liquidity air pocket, the TGA rebuild. And then, what you saw at the end of 2025, when the repo market started to feel the pressure of tighter liquidity, and I can evidence that just looking at this chart. Previously, this is looking at imbalances in the repo markets. The spikes that you see on that chart, think of this as a uh you know, a maybe a heart monitor. Uh this is showing the system is coming close to a coronary attack at the end of 2025. So, the Fed comes in with more liquidity, and as I've indicated there, that's what it was denoted by the RMP. This is yet another acronym that the Fed has invented, uh disguised QE program where they're injecting more liquidity into the markets. And you can see that jump in the orange line has basically, you know, helped to keep liquidity levels up, but notwithstanding that, the strength of the economy is meaning the net of the net is that we're still looking at some sort of inflection downwards. But, this shows what the Fed, broadly speaking, has been doing through this period. Now, I think the other thing that you've got to you've got to start to think about is that, you know, what we're what we're looking at here is a monetary authority, and I extend that to the Treasury as well, that is very active in the markets. And either you're reassured that they're doing this, or you're concerned, like us, that cracks are appearing. And one of those cracks is clearly tensions in the repo market, as I indicated. So, this is what was happening as soon as liquidity started to tighten, you saw this thing this indicator jump.
Another relationship receiving attention is the long-term ratio between gold and oil prices. Historically, 1 oz of gold has often traded near the value of 20 barrels of oil. With gold remaining historically elevated, Howell argues that oil appears relatively inexpensive using this comparison. Whether this historical relationship adjusts through higher oil prices, lower gold prices, or a lasting structural shift remains uncertain, but the ratio continues attracting attention as investors evaluate long-term commodity valuations. History suggests that prolonged reliance on such financing methods can eventually create inflationary pressures, even if those effects appear gradually rather than immediately. These developments illustrate how liquidity, government borrowing, commodity markets, and investor behavior are becoming increasingly connected. If liquidity ultimately determines the direction of financial assets, how will policy makers manage the next phase of expanding debt without reshaping the investment landscape once again? Stay with us for more in-depth market analysis and financial insights. If you enjoyed this video, be sure to like, subscribe, and turn on notifications so you never miss an update. Thanks for your support, and we hope you enjoy the video.