Scariest Part of Gold Crash? No One Knows Why It Happened

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The two-day crash in the price of gold is one of the most devastating asset sell-offs ever witnessed on Wall Street, right up there with the stock market crash of 1987. What makes it that much worse is no one is exactly sure why it happened.

And until investors get some answers, the selling may continue, they say.

"Unless you have a catalyst, 'cheap' gets a lot cheaper during a crash in price expectations," said Keith McCullough of Hedgeye Risk Management. "Old Wall calls it 'catching a falling knife' for a reason."

Gold posted its biggest two-day dollar drop ever and its biggest percentage drop since 1980 when the carnage settled Monday. Prices rebounded slightly in early trading Tuesday. It's now down 26 percent from its 2011 high. (For the latest price, click here.)

"We are running out of superlatives to attach to the gold price move since last Friday," Nomura analyst Tyler Broda wrote in a note to clients. "The rarity of a move like this is notable."

(Read More: Gold May Head 'Much Lower': Broda)

It seems like every trader on Wall Street has a theory for the move. Most commonly cited are fears of central bank selling (especially Cyprus), exchange-traded funds liquidation, global deflation setting in, a weak yen strengthening the dollar, and mysterious hedge funds blowing up from margin calls.

"The major holders of gold other than the U.S. (i.e., the EU and England) need gold to support their economies and banks," said Sean Egan of Egan-Jones research. "A little selling has a major impact on supply and feeds price declines and follow-on selling." But the Cyprus theory has yet to be proven. Reportedly, there is an internal debate still raging inside Cyprus to sell gold to pay its growing bailout tab, but they have not sold any gold yet.

Many say there may not be a fundamental reason to pinpoint for the bullion crash. After all, the metal has no fundamentals like cash flows or dividends, so it is only worth what others are willing to pay for it. After a 13-year run, perhaps it was time for other assets like Treasurys and high-yielding stocks to gain favor among the safe-haven crowd.

"Commodities trade even more technically than other assets since it's futures driven," said Enis Taner, global macro editor for The crash "was technical more than anything in my view."

Taner points to the $1,530 to $1,550 area for gold, which was support for the metal for almost two years. Once it broke below that, the rush for the exits started.

And that's where a new facet of this trade, which was not around in 1980, may have thrown fuel on the fire: ETFs. They give the average Joe access to the gold futures market and these less sophisticated investors may not have the same pain threshold or capital as institutional investors.

(Read More: Mark Fisher: Gold Bulls Should Love This)

The SPDR Gold Trust (GLD), the most popular gold ETF, traded 150 million shares during the two-day slam, more than the total volume of the previous 16 days. This smacks of panic selling.

"The gold market metrics are in uncharted territory," said David Greenberg of Greenberg Capital. "The GLD effects on gold in a panic sell-off have never been tested."

History has shown that once gold enters a bear market (20 percent off high), it keeps going lower by another 14 percent on average, according to data going back to 1975 crunched by Bespoke Investment Group. That would put the metal well below $1,300.

"While no one of these explanations may be sufficient to explain a 20 percent move, collectively they all matter," said Robert Savage, chief strategist at FX Concepts and previous director of FX macro sales at Goldman Sachs. "Gold is unlikely to bounce much—it's a heavy metal after all—with the larger medium term risk of $1,100."

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