The flash crash in gold that occurred on Wednesday seemed to have as much logic behind it as the infamous stock market flash crash of May 6, 2010 when the Dow Jones quickly plunged 1,000 points for no particular reason.

Yesterday's extraordinary price action in the precious metals has again resulted in mainstream press speculation about whether the gold bubble has burst. For some perspective on that topic, Gold Bullion International has put together a great graphic - Is Gold A Bubble? which can be viewed here.

There is also a very bullish aspect to gold's flash crash which has gone relatively unmentioned. For every seller there is a buyer and someone was more than happy to buy millions of ounces of gold at a discount. Discussing this bullish side of the gold smash down, Barry Stuppler of Mint State Gold asks Who Bought The 34 Million Ounces of Gold?

First of all, the volume for the CME’s most active gold contract, which is now April 2012, was 344,994 one hundred ounce contracts (34,499,400 oz was traded) a record high. Gold prices dropped $77 per ounce yesterday based on slightly negative news, specifically the lack of mentioning a possible QE3 by Fed Chairman Ben Bernanke. Mr. Bernanke’s congressional testimony does not change any of the fundamental reasons to own gold.

During my 50+ year career of trading gold I have seen similar exceptional days like this. Traders call this type of day “shaking out the weak hands”, because many small investors and speculators are driven out of the market by stop loss sell orders and margin calls. So, who bought the 34 million ounces of gold and what will happen next?

I think that trading on today, Friday and Monday will tell the tale. If gold can stay above important $1,700 per ounce level by the end of Monday’s trading and hopefully rally above $1,725 per ounce, I believe this will tell us it was a cleaning out of small investors and speculators. On the other hand if gold stays below $1,700 per ounce and begins trading at $1,680 or below, that could indicate that today’s rally was at “Dead Cat Bounce”.