Here's Why Gold Is Getting Crushed

The sharp fall in gold prices Monday was caused by a number of different factors, but margin calls may have over-extended the drop and forced many to liquidate their positions, said Thomas Vitiello, partner at Aurum Options Strategies. Vitiello remains bullish on the commodity in the long term and said this situation could create opportunities for investors.

Gold prices broke through the $1,400 level Monday, sparking worries that the 12-year bullish cycle in the precious metal may be at an end.

"This has been a pretty drastic drop, volatility in the options market has exploded overnight and there are a lot of margin calls and people liquidating positions," Vitiello said on "Squawk on the Street" Monday. " A lot of passive longs that were in the market are out. Most people that bought gold last year are underwater so they have to liquidate their positions."

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When asked whether the drop in gold can be explained by fundamental forces, such as the Federal Reserve's tapering strategy or the events in Cyprus, Vitiello said, "I think it's a convergence of a lot of different factors. There was a lot of negative sentiment, so people are getting nervous and the longs liquidate. It over-extends because of the margin and those sometimes give you some opportunities to catch an over-extension and get long."

"A lot of people were bullish at $1,800, they're not doing well right now. Everybody is bearish here so maybe you should look for an opportunity," he said.

"What happens is the fundamentals are there and it's not responding the way you would think it would, so you have to look at that," he added. "You can't buck the trend, but right here, how could you be bullish?"

Vitiello added that the technicals tell the story: once gold broke the $1,525 level, technical analysis showed a "triple bottom" that forced many investors to liquidate.

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"At this point we look at the retracements, in terms of the technicals," Vitiello said, pointing to a 38 percent retracement from the low to the high in gold. "The next one is a 50 percent retracement, which is $1,300. So we look to see how it reacts if we get there." He added that after this, the next technical level is around $1,150, which would represent a 62 percent retracement. "It's a pretty large decline," he said.

"People can't be too overexposed to it because of the volatility. I think you should always need some exposure to (gold) for currency risk, but you have to keep that exposure to a minimum and be able to weather the storm and when the market goes down, you're able to buy more."

Looking at the Gold ETF or using an options strategy to limit your downside would be possible plays right now, Vitiello said.

"Odds favor a bounce off of capitulation," said Frank Holmes, U.S. Global Investors CEO and CIO. "I think many of these gold producers are coming down to their marginal cost and you're going to see supply start to shrink from the supply of gold mines. No more expansion."

Holmes, whose fund holds a significant position in gold, notes that although there are fears that European countries may be gold sellers, other countries, including Mexico and several Middle East and Asian countries are increasing their holdings. "I think there is a big shift and central banks will continue to increase their exposure to gold. They love it when you get these corrections," he said.

However, some see a fundamental change in the market that will support the bearish case for gold.

"The speed of this sell-off is really amazing," said David Greenberg, founder of Greenberg Capital and the former NYMEX board director. "Thirty years ago, everyone had an opinion. Now, these algorithms are basically written the same way. Once the algo kicks in to the sell side, or even the buy side, there is opinions, there is nothing to stop this market."

"If you're long, it's not a great place to be, but by no means is it a catastrophe," Greenberg said. "Within the next $50, you're going to start seeing the market calm down. The headwinds to a rally in this new gold market are going to be extraordinary with the amount of weak longs that are still in this market that still need to get out."

— By CNBC's Paul Toscano. Follow him on Twitter and get the latest stories from "Squawk on the Street" @ToscanoPaul