Gold futures drop after dollar gains against euro

Other commodities traded mixed, with crude oil shooting to a new record near $127 a barrel and agriculture futures broadly falling.

The dollar rebounded after Federal Reserve Chairman Ben Bernanke said Monday that turmoil in financial markets was "far from normal" but had eased somewhat. Bernanke credited the improvements to the Fed's efforts to help distressed banks and investment firms overcome the credit crisis, including slashing interest rates and a decision in March to temporarily allow investment firms to obtain emergency financing from the Fed.

A stronger dollar encourages investors to sell hard assets like gold and silver, which are considered safe-haven investments during times of rising inflation.

"The dollar has moved higher on Bernanke's comments and that has in turn led to a flight out of precious metals," said James Steel, analyst with HSBC in New York.

Gold for June delivery fell $15.30 to settle at $869.60 an ounce in light trading on the New York Mercantile Exchange, after earlier falling as low as $861, its lowest level in a week.

Gold has gained 20 percent in the last year, driven up by a weak dollar, record-high crude prices and nervousness about the U.S. economy. However, the metal has lost some of its luster lately as the dollar has stabilized, falling well below its all-time high of $1,038.60, reached March 17.

Steel said the lower prices could spur demand for jewelry and other gold products, helping the metal pare some of its recent losses.

"We tend to see jewelry demand pick up when prices fall so I suspect to see the bottom cushioned somewhat," he said.

Other precious metals also traded lower Tuesday. Silver for July delivery fell 39.7 cents to settle at $16.828 an ounce on the Nymex, while July copper lost 1.80 cents to settle at $3.7315 a pound.