NEW YORK (TheStreet ) — Gold prices failed to stand their ground Monday as hopes that Europe can contain and solve its sovereign debt crisis faded.

Gold for December delivery closed down %6.40 at $1,676.60 an ounce at the Comex division of the New York Mercantile Exchange and prices were continuing lower in after-hours trading. The gold price has traded as high as $1,696.80 and as low as $1,677 an ounce while the spot gold price was shedding $9, according to Kitco’s gold index.

Silver prices lost 35 cents at $31.82 an ounce while the U.S. dollar index was up 0.72% at $77.16.

Hope is the key for gold and hope faded away on Monday. Eurozone leaders have one week to come up with a viable plan to contain the sovereign debt crisis — saving Greece, recapitalizing banks, and determining the fate of sovereign bondholders.

The original plan for Greece was another 109 billion euro bailout, which had been agreed upon at a July meeting. But that figure is now too small to save the country, leaving Eurozone leaders trying to figure out how big of a loss they can force bondholders to take.

As a result, officials must consider how to recapitalize European banks to protect them against such losses as well as how to expand the European Financial Stability Fund, or EFSF, to provide financial support for sovereign nations, bondholders and banks.

Although European leaders are committed to coming up with a plan, which was supported by the G-20 over the weekend, they still have to find one and the devil will be in the details. A spokesperson for German leader Angela Merkel on Monday warned that progress would be slow and a definitive solution might not show itself this weekend at the European Union meeting Sunday.

The disappointment led investors to dump stocks and gold as the two have been moving side by side of late. Disappointment drags on the euro, boosts the dollar and hurts gold prices or vice versa. If investors feel less confident about stocks then they might have more need to liquidate good performing assets like gold. When investors feel better about their risk tolerance then they have less need to sell gold.

This tug-of-war will likely dominate trading in the week ahead. “Open interest shows traders are in and out at the drop of a hat or remark from Europe,” says George Gero, senior vice president at RBC Capital Markets.

Net long positions only increased by 3,737 contracts in the week ending October 11th, according to the latest Commitment of Traders report. Speculative short positions decreased by 2,856 contracts, which means part of last week’s rally can be attributed to short covering, traders unwinding positions where they were betting against the gold price.

Kitco’s Gold Index, however, points to stronger physical demand with the gold price actually up $2.75, but with those gains tempered by a stronger U.S. dollar. India’s famous Diwali season starts next week. The festival of lights marks a tradition of gift exchanges and shopping particularly for gold jewelry. Buying goods, especially during the first five days of the festival, is considered good luck and many experts are looking for a ramp up in physical gold purchases.

“For the moment gold continues to build a base above the $1650 mark with physical demand, particularly from India,” says James Moore, research analyst at FastMarkets.com. “Inflation remains stubbornly high in India, over 9% for the 10th month in a row,” says Mark O’Byrne, executive director at GoldCore, a bullion dealer, “and this is leading to continuing store of wealth demand from Indian buyers.”

Gold mining stocks were sinking Monday. Kinross Gold(KGC) was losing 2.26% to $14.30 while Yamana Gold(AUY) dropped 1.84% to $14.92. Other gold stocks, Agnico-Eagle(AEM) and Randgold Resources(GOLD) were trading lower at $57.19 and 100.55, respectively.

–Written by Alix Steel in New York.

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NEW DELHI: Buying gold for the festive season is a tradition in most families, and despite its sky-high prices, this year is no different. And the crowd on Saturday at the Festival of Gold, organized by MMTC, which is the largest bullion importer for India, was enough to validate that gold still reigns supreme.

The price of gold went up by Rs 45 to Rs 27,165 per 10g on Saturday, and experts say this steady rise is the reason behind sustained, if not increased, demand. “People have money to invest but there is a lack of avenues. Gold provides a hedge against inflation, and the steady rise in gold prices makes buyers perceive it to be a safer investment. Besides, it is a tangible investment, and many buyers like the feel of gold in their hands,” said N Balaji, general manager, precious metals, MMTC.

From delicate chains to gold biscuits to heavy sets, there was something for everybody, but most chose to invest in jewellery since the wedding season is coming up. “I am here to buy jewellery because apart from it being a sound investment, I don’t have to stow it away. I can actually utilize it,” said Dr Nirupama, a radiologist. And she is not alone. Balaji said about 75% of the total demand for gold is by way of jewellery.

Gold might sit pretty at the top, but when it comes to silver people are still wary. The silver price has been fluctuating, and the volatile situation has scared many buyers from investing in silver. “There was a time when people expected the price of silver to reach Rs 1 lakh per kg, but as soon as it touched Rs 70,000, it plummeted. People don’t want to buy when the situation is volatile,” said Balaji. While gold appreciated on Saturday, the price of silver dipped further by Rs 250 to settle at Rs 53,550 per kg.

Rameshwar Lal Gupta, who has been running his family business of silver articles for 15 years, said demand for silver was at an all-time low, “Demand is 50% less now. People who need it for weddings or small gifts are the only ones buying.”

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The broader equity markets were mixed as well yesterday, with the Dow Jones Industrial Average (DJIA) dipping 0.2% to 11,416.30 and the SP 500 rising 0.1% to 1,195.54.  In currencies, the euro initially slid to 1.356 versus the U.S. dollar as the European sovereign debt crisis continued to weigh on the minds of investors.  Despite yesterday’s decline, rising confidence in the ability of European leaders to prevent a system-wide shock stemming from the eventual default of Greece has helped boost the single European currency in recent days.  The euro gained over 1% to 1.378 against the U.S. dollar this morning.

Dr. Martin Murelbeeld, chief economist at Dundee Wealth Economics, discussed the euro zone debt crisis in a report published on Tuesday.  He argued that the European Central Bank (ECB) needs to significantly expand the size of its bailout programs to adequately shore up the banking system.  A “bazooka” in the range of a €2 trillion – as opposed to the €440 billion European Financial Stability Fund (EFSF) – is necessary, according to Murenbeeld.

“Of course, Greece will default,” Murenbeeld added.  “But that is exactly why central bank money is required.  Such a default will have massive repercussions through the Euro-banking sector. To stop an ensuing bank run the lender of last resort – the ECB – will have to lend governments money with which to top up their banks, regardless of how solid such paper really is.”

As for the gold price, he predicted that it “will likely trend sideways, within a fairly wide band, until such time as the ECB/EFSF readies the aforementioned bazooka, which it will inevitably have to do when a major bank default occurs.”   Murenbeeld – a long-time gold bull – also noted that “We are fundamentally bullish on gold, regardless of recent trends.”

“If 2008 is a guide then there is a chance” that the gold price’s 200-day moving average “could be tested in due course,” Murenbeeld contended.  “Pressure continues to build for a European policy response however, so we cannot rule out a sudden updraft in the gold price on the back of new monetary policy initiatives in Europe. Leaders seem to agree that something needs to be done but, as of yet, the ‘bazooka’ is nowhere to be seen.”

David Rosenberg – another long-time gold price bull – offered similar advice for Europe in a note to clients on Tuesday.  “No doubt it is good to see EU policymakers shift from denial to acceptance but the reality is that the extent of the bank recapitalization needs to far exceed any government’s capacity to remedy the situation in its entirety.”

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