NEW YORK ( TheStreet ) -- Gold prices drifted lower Wednesday as a stronger dollar weighed on prices and as traders took profits headed ahead of the Thanksgiving holiday.

Gold for December delivery shed $6.50 at $1,695.90 an ounce at the Comex division of the New York Mercantile Exchange. The gold price 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 prices lost $1.06 at $31.88 an ounce while the U.S. dollar index was up 1.21% at $79.18.

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

"Most of the December contract sales went to February, April and June contracts," he said, "there was less than expected open interest loss," which means that traders still wanted to be long gold. Ross Norman, CEO of SharpsPixley, says that speculative traders might be rebuilding their long positions after the big shake out in September when gold plummeted 10% in a few days.

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 a selloff. Moore said this suggests gold will remain cushioned and prices will push back to $1,800 an ounce.

Bouts of liquidation were triggered by deflationary fears as Chinese manufacturing activity slowed in November to the lowest level in 32 months and as eurozone manufacturing remains in contraction territory. Attempts to address the debt problem in Europe haven't been enough, sparking weakness in the euro, boosting the dollar and providing a headwind for gold.

With borrowing costs rising for France and Spain, the International Monetary Fund stepped in on Tuesday with plans to make loans available for creditworthy countries -- offering up to five to 10 times the amount the country in question 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 was 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, or 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 money and a viable alternative to paper currency. More money printing in the ECB coupled with accommodative policies in the U.K. and U.S., could also spur inflation worries and highlight gold as a store of wealth.

"If Europe sinks then it would impact all currencies," says Norman of SharpsPixley, "and be a positive for gold." Norman thinks the gold's inverse correlation to the U.S. dollar would disappear and that there would be a "considerable rally in the gold price."

Even if gold was used as collateral for a eurobond, Norman argues that is a positive for gold. "It highlights the fact that it is the asset of last resort ... gold is the asset that holds it value and it underlines gold's incredibly important roll."

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 the rate of China's slowing growth to engineer a soft landing. The move wasn't accommodative but it is laying the ground work for something more aggressive like cutting rates or providing stimulus. China's inflation rate is at 5.5% and the World Bank said prices could fall 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 lower Wednesday. Yamana Gold ( AUY) was down 2.14% to $15.06 while Kinross Gold ( KGC) was losing 1.15% at $12.95.

Other gold stocks, Agnico-Eagle ( AEM) and Eldorado Gold ( EGO), were trading higher at $42.28 and $16.83, 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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