After falling for four straight months, the US dollar index $DXY is up three days in a row. Whether the near-term dollar strength turns into a more sustained trend is anyone’s guess.
Regardless, risk assets feel the pressure as many areas begin to correct, including precious metals.
Despite this recent selling pressure, we have clear levels to trade against when it comes to Silver and mining stocks.
Before we dive into those critical levels of interest, a friendly reminder…
An overwhelming amount of supply still exists for Gold futures in the 1,924-1,965 zone:
It’s not surprising to witness gold correct below this level, especially since it gained more than 20% off its Nov. low.
In fact, I would be more surprised if gold didn’t pause at this level. I’m not concerned with the selling pressure in Gold.
On the other hand, the next two charts highlight key levels precious metal bulls need to defend.
First up, Silver futures:
I noted a couple weeks ago the bull flag in Silver looked a bit long in the tooth. Fast forward to last Friday, and silver dropped more than 5% to close out the week.
It now approaches a shelf of former lows at approximately 21.40. These former lows coincide with the ‘08 and ‘16 peaks. Precious metal bulls want to see this level hold now that they have finally reclaimed it.
The same can be said for gold and silver mining stocks:
The PHLX Gold & Silver Index $XAU looks similar to silver – stuck in the middle of a multi-year range after reclaiming a key level of former support.
Interestingly, the level of interest for XAU at approximately 115.50 occurs at its 2016 high and pivot lows from 2021 – much like silver. I like adding to my long exposure to mining stocks, but only if the index holds above that level.
I’m not trying to spin any conspiracy theories regarding the 2016 highs. I simply want to clarify that these are critical levels for these assets. And they need to hold. Risks are to the downside for mining stocks below that level – no question.
Corrective action makes sense for precious metals right now – as does building a position against those crucial levels. Metals across the board have ripped higher over the past few months. Gold ran into a multi-year resistance level. And now the dollar has begun to show near-term strength.
And the best part: The market will let us know very quickly if we’re wrong.
