Gold slides into Thanksgiving

By Alix Steel

Updated at 3:14 p.m. ET

Gold settled lower Wednesday as a stronger dollar weighed on prices and as traders took profits headed into the Thanksgiving holiday.

Gold (-GC) for December delivery shed $6.50 to settle at $1,695.90 an ounce at the Comex division of the New York Mercantile Exchange. Gold has traded as high as $1,710.80 and as low as $1,677.10 an ounce while the spot price was down $11, according to Kitco's gold index.

Silver (-SI) fell $1.06 to finish at $31.88 an ounce while the U.S. dollar index was surging 1.2% at $79.18.

Gold prices have had a volatile week -- down 2.7% Monday then up 1.4% Tuesday -- and now traders are locking in profits after options expiration. George Gero, senior vice president at RBC Capital Markets, noted that options expiration was somewhat constructive for gold.

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"Most of the December contract sales went to February, April and June contracts," he said, which means there was no substantial changes to open interest, that traders still wanted to be invested in gold.

With volume light over the next few days, "the complex remains vulnerable to bouts of long liquidation/cash generation," said James Moore, research analyst at FastMartkets.com. But the SPDR Gold Shares (GLD) added 6 tons Tuesday, which points to strong buying after Monday's sell-off. Moore said this suggests gold will remain cushioned and prices will push back to $1,800 an ounce.

Bouts of liquidation will be triggered by deflationary scares as Chinese manufacturing activity slowed in November to the lowest level in 32 months and as eurozone manufacturing remains in contraction territory. Attempts to shore up the debt problem in Europe haven't been enough, which weighs on the euro, boosts the dollar and provides a headwind for gold.

With borrowing costs rising for France and Spain, the International Monetary Fund stepped into make loans available for credit worthy countries -- up to five to 10 times the amount it contributes to the IMF for up to two years.

Tony Crescenzi, strategist and portfolio manager at PIMCO, said the program targets smaller countries "and therefore is unlikely to lead to much in the way of new bank reserves in the global system."

This means that Europe is still in trouble. That was underscored by the fact that Germany was unable to borrow the full amount it wanted at Wednesday's debt auction. Borrowing costs were down but the country didn't get bids for 35% of its bonds.

The European Commission is discussing the possibility of eurobonds Wednesday with gold used as collateral, according to the Financial Times, and cries are getting louder for the European Central Bank to become the lender of last resort -- to print money to save the euro.

Both of these options are positive for gold. Using the metal as collateral doesn't mean selling it but supports the bulls' thesis that gold is a viable alternative to paper currency. More money printing by the ECB, coupled with accommodative financial policies in the U.K. and U.S., could also spur inflation worries and highlight gold as a store of wealth.

People's Bank of China also cut reserve requirements for five local banks Tuesday, which means they are allowed to hold less money in their coffers. The hope is that the banks will lend the money and help ease China's slowdown to engineer a soft landing. The move may be laying the groundwork for something more aggressive like cutting rates or providing stimulus. China's inflation is at 5.5% and the World Bank said price increases could slow to 4.1% next year. With inflation less of a risk, China might be more apt to pump more cash into the system, which is bullish for gold.

Gold mining stocks were falling Wednesday. Barrick Gold (ABX) was down 2% to $48.08, Goldcorp (GG) was tumbling 3.7% to $48.67 and Randgold Resources (GOLD) was falling 2.8% to $105.95.

Newmont Mining (NEM) was losing 1.9% at $64.55 after a 30% tax hike on miners just passed the lower house in Australia and is expected to pass the Senate in 2012. The tax is lower than the 40% originally floated, but Newmont has exposure with its Boddington gold mine, which started production in July 2009 and which has about 20 million ounces of gold reserves and 2.4 billion pounds of copper.