Gold rallied on Tuesday to close about $800 an ounce on speculation that turmoil in credit markets will force the Federal Reserve to cut interest rates, further boosting the appeal of the precious metal.

Gold for February delivery closed up $8.10, or 1 percent, at $807.40 an ounce on New York Mercantile Exchange. The price peaked at $811.40 during the day. The precious metal gained 27 percent this year as the dollar fell 8.4 percent against the euro.

Gold may trade in a range between $786 and $815 prior to a likely decisive break out to the upside early in the New Year, said Mark O'Byrne, director at Gold and Silver Investments Ltd, in a research note.

Gold was strong over the Christmas period last year and may be again, O'Byrne said. Last year it was strong at Christmas, sold off early in the New Year and then rallied from mid-January until early March.

The Commerce Department said housing starts in the U.S. dropped 3.7 percent and permits for future construction slid to a 14-year low, stirring further concerns from investors of a further rate cut. The European Central Bank added $501 billion to the banking system in a bid to ease the global credit crunch. The fed also lowered the overnight lending rate 1 percentage point to 4.25 percent earlier this month.

The lower borrowing cost has caused the U.S dollar and gold to go in opposite directions as the weakened dollar, bolstered gold. The dollar index, which tracks the performance of the greenback against a basket of other major currencies, was flat at 77.405.