MARCH FUTURES EXPIRY / MACLEOD FINANCE

March futures expiry

It’s clear that as the Iran war rages, the dollar will be a casualty and gold benefits. But the bullion banks need to square their books. That’s what contract expiry is currently all about.

ALASDAIR MACLEOD

Looking at the silver chart below, it may be too early to call a resumption of the bull trend but coupled with the lowest open interest for over 20 years, one can only conclude that paper silver is deeply oversold and will struggle to go any lower. 

Furthermore, when it does turn, it’s set up for a massive run higher given a severe lack of physical and that despite prices almost halving backwardations persist. 

Gold is similarly oversold with Comex open interest under 400,000.

This week saw further weakness in gold and silver prices. 

In European morning trade today, gold was $4410, down $55 from last Friday’s close having hit a low on Wednesday of $4100 approaching its 250-day moving average. 

Silver at $68.20 is up 30 cents net, after testing $61. 

Turnover in both Comex future contracts was reasonably high.

Yesterday was the last trade day for April’s Comex options. 

This explains the heavy mark-downs as bullion traders who had sold calls were incentivised to ensure as many as possible would expire worthless. 

This is followed by the expiry of the April contract with the start of the 3-day delivery process commencing next Monday.

The April contract is the active one for gold, and on preliminary figures last night there were still 63,034 contracts to sell, roll, or stand for delivery. 

Silver is relatively unaffected, its next active contract being May. 

But in gold’s case, we cannot rule out paper shenanigans until All Fools Day next week

In previous market reports, we have pointed out that gold is driven less so in war as a safe haven than the dollar. 

For liquidity, regulatory, and accounting purposes the dollar is preferred, and this is reflected in the chart for its trade weighted index:

If the TWI breaks above 100 convincingly, a golden cross will form suggesting a significant upturn is on its way. 

This is another way of saying that the euro, yen, and pound will weaken against the dollar. 

It should not surprise, given that despite everything that the dollar faces it remains the safe haven for fiat currency traders.

This doesn’t matter for gold, despite what hedge fund and investment managers may say, because the house of cards is comprised of all fiat currencies. 

Our next chart zooms out to illustrate the ultimate big picture for the dollar and all the currencies which refer to it, and how it correlates with the gold price of the German reichsmark over a century ago admittedly with differing timescales.

It is the fate of the reichsmark translated into today’s fiat curencies which gold stackers are hedging. 

The next chart shows how volatile gold can be in a currency collapse, again taken from 1918—1923 reichsmark collapse plotted until June 1923, following which volatility was in the thousands when the reichsmark finally collapsed.

History tells us not to worry about a little local difficulty but to keep the big picture in mind. 

So, where is the dollar headed?

Iran is insisting that only oil cargoes paid for in Chinese yuan can have free passage out of the Persian Gulf, giving a big boost to the petroyuan at the expense of the petrodollar. 

If this process is allowed to continue, 54 years of dollar accumulation is there to be unwound as the entire Middle East is de-dollarised. 

The effect on US Treasury holdings is not so much an issue, with the Saudis and UAE recorded as holding a combined $247.2bn.

The problem is regional holdings in other US debt and investments such as deposits, corporate debt, and equities in particular. 

Kuwait, the UAE, and Saudi Arabia have a combined investment in US equities of $875bn at end-January according to US Treasury TIC figures. 

The total for Asia, including China and Japan is $5,032.346bn. 

Corporate bond totals are not insignificant either.

Meanwhile, the US appears to be gearing up for a land invasion, perhaps this weekend. 

If so, expect more volatility in oil, gold, silver, and financial markets next week. 

Short-term traders are likely to be whipsawed, while stackers will seize opportunities as they arise, with the ultimate fate of fiat dollars in mind.