Gold dropped $27.50 or 1.6 percent to $1,670.70 per troy ounce, as gold reached a sell-off threshold prompted by worries that budget talks in Washington had hit a snag.
House Speaker John Boehner, R-Ohio, triggered the sell-off when he remarked that he was working on a backup plan in case the so-called fiscal cliff could not be avoided, The Wall Street Journal reported.
Lawmakers are working to create a budget compromise that would avoid mandated tax hikes and spending cuts that economists fear could send the U.S. economy back into a recession.
Silver for March delivery shed 61 cents or 1.89 percent to $31.67 an ounce.
The dollar index dropped 0.29 percent to 79.35 on the International Exchange.
The euro fell to $1.3224 from Monday's $1.3229. The dollar rose to 84.27 yen from 83.20 yen.
The Australian dollar fell to $1.0522 from $1.0535. The U.S. dollar rose to 0.9859 Canadian from 0.9857 Canadian. The British pound fell to $1.6249 from $1.6252.