We have made the reasonable deduction, based on technical patterns and indicators, and COTs and sentiment etc, that the key $1500 gold and $26 silver support levels are going to hold leading to an important reversal, but as we know you cannot rely entirely on normal logic in this business, where anything can happen and often does.

While we have resolved to buy in this area because of the highly favorable risk/reward ratio, which enables us to set close stops and avoid serious loss if these key support levels should fail, there is another approach that deserves to be mentioned, that may be used not just to offset potential losses, but in addition to reap potentially big gains in the event that gold and silver crash these support levels, and that is the use of options. For if gold and silver do break down soon we could be looking at a rapid and brutal plunge, even though this scenario is suggested as unlikely by COTs and sentiment. It almost feels as if powerful forces are engaging in a game of brinksmanship with investors.

For those of you set up to trade them, options in the PM sector are a prudent choice here, primarily for protection but with the secondary objective of racking up potentially huge gains in the event that the support does fail, and a plunge follows. Because stocks are horribly undervalued relative to gold and silver, you should steer clear of Puts in stocks, or stock indices or stock ETFs. Instead do those based on direct gold and silver proxies – Puts in SPDR Gold Trust (GLD) and iShares Silver Trust (SLV) are ideal as they move exactly in line with gold and silver and they carry a wide range of options which are always very liquid. Suggested Puts are the GLD May 145 at $0.40, which is cheap and thus affords high leverage, and will start moving point for point if GLD, which closed last night at $150.73, drops below $145. For silver the SLV May 24.50 Put at $0.10 is cheap and provides high leverage if SLV moves below $24.50 (SLV closed last night at $26.09). Those wanting protection to kick in from the breakdown point may want to go for the higher priced May 26 Put now at $0.31.

These options are highly recommended for experienced subscribers here, as they enable you to both protect existing holdings from a potential plunge, and/or to go long with an insurance policy in place, and additionally, if gold and silver’s key support levels did fail, the plunge that could result would lead to these options soaring in price resulting in windfall profits, because as they are still “out of the money” and highly geared, you can buy a heap of them for peanuts. Options here afford not just protection but the prospect of potentially large gains, and have the additional advantage that they spare you from being whipsawed out by a false breakdown, which Big Money could stage here, to run remaining longs out of their positions.

Posted at 5.50 am EDT on 4th April 13.