Reports that Cyprus was going to sell 40 tons of gold was an immediate catalyst for selling, but traders say the bigger factors for selling across markets are concerns about a softening economy, and reports of weaker demand in the oil market.
(Read More: Why a Cyprus Gold Sale Isn't Being Taken Seriously)
"There's a tremendous amount of new shorting going on in the metals market right now," said Kevin Grady, president of Phoenix Futures and Options. Grady said when gold broke through the $1,525 to $1,539 level, it unleashed a new wave of selling.
"That's where all the big stops were. The big support level will now be the huge resistance levels…I think we're going to test the 1,450 area as long as the market does not break back above those levels and run the shorts out," he said. "The shorts have the market going their way, and I don't see them getting out. Right now they control this market."
The market has been increasingly negative on gold, with Goldman Sachs making a high-profile call to short it this week. "You've had lesser open interest. In the last few months, we lost about 20 percent of our open interest and on top of that every other asset manager has moved away from gold into strong stocks. Right now the path for least resistance for gold is lower," said RBC analyst George Gero.
Bespoke Investment Group said based on the past 13 bear markets in gold, the metal could have further to fall. Gold will officially be in a bear market, or 20 percent decline, if it closes at $1511.
The average decline in prior bear markets was 14.2 percent over a period of 309 days. While unlikely to follow that exact pattern, that would indicate gold could trade at $1,281 by Feb. 15, 2014, said Bespoke.
Grady said if gold does get to that level, it could be problematic for producers. "The cost of product for a lot of these mining companies is up around the $1200 level, the $1300 level. You're actually going to see some of the people at this level saying we're going to shut down these mines," he said.
The fact that Cyprus came up with a proposal to sell 40 tons of gold, after it appeared earlier reports of Cypriot gold sales were not true, was what spooked the market. "That's all it took. All the sell stops went off, and all the bells went off, and everybody's bailing ahead of this," Gero said, adding gold could find some support around $1500.
"It's not the fact that Cyprus may have to liquidate their gold reserves in order to finance their bailout, it's the fact that if any other country in the world gets in trouble, gold is going to be the first thing to go," said Bill Baruch, senior market strategist at iiTrader in Chicago. "And really,generally speaking, in the last five years, countries have had enormous gains in gold reserves. So if you're a country and you run into financial troubles, those gold reserves are the first thing they're going to have to liquidate in order to finance their bailout."
Baruch expects to see selling continue. "A bottom isn't a price, it's a process. So our target is $1,474, but that might not be the exact low. It just might be where this process starts." Baruch sees $1,474 as a level of support. He is currently short gold.
But Grady said Cyprus is a negative warning about the fiscal conditions in Europe, and it should normally be a positive for gold, as should Friday's weak U.S. economic data and the saber rattling by North Korea.
As for oil, John Kilduff of Again Capital said the weak economic reports are only adding to what the market is already suspecting.
"This past week, three lead agencies reduced their demand figures, and the IEA (International Energy Agency) openly speculated about a potential bear market in crude, so the narrative from them was much more damaging for the outlook than the actual numbers," Kilduff said.
(Read More: Is 2013 the Year of $50 Oil and $1,200 Gold?)
—Drew Sandholm contributed to this article.