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 "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.

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-- Written by Alix Steel in New York.

>To contact the writer of this article, click here: Alix Steel.
Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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