Gold futures fell to its lowest level in three weeks on Thursday; dropping more than $21 an ounce, on speculation the U.S. will increase interest rates in order to protect the dollar which dampened the demand for the precious metal as an alternative investment.

Gold for August delivery closed $8.30 lower at $875.50 an ounce on the Comex division on the New York Mercantile Exchange. The precious metal traded as low as $868 earlier in the session, the weakest intraday level it's seen since May 2.

Over the last three trading sessions, the contract lost a total of $21.50. Gold has lost more than 15 percent from a record $1,033.90 set March 17.

Short-term improved dollar sentiment and easing oil prices are likely to weigh on gold, said James Moore, an analyst at, in a note to clients.

But as inflation becomes an increasing issue globally and credit market issues resurfaces, investors are likely to increase their demand for safe-haven assets such as gold, he noted.

The dollar index , which tracks the greenback against a basket of six major currencies, was at 73.056, down from 73.469.

In energy trading, crude futures rallied by more than $5 a barrel, rebounding from Wednesday's drop to their lowest level in a month. Light, sweet crude for July delivery rose as high as $128.26 before easing to settle up $5.49 at $127.79.

Also on the Nymex, July silver gained 23 cents to close at $17.17 an ounce.

July platinum added $17.60 to finish at $2,012.50 an ounce, while September palladium shed $3.60 to close at $427.40 an ounce on the Nymex. July copper closed unchanged at $3.543 a pound.