Silver and copper futures also posted strong gains.

Gold for February delivery hit an intraday high of $883.80 an ounce on the New York Mercantile Exchange, surpassing the previous record of $875 set on Jan. 21, 1980. The contract surged $18.30 to end at $880.30 an ounce, a new all-time closing high.

Still, the new record high was considerably lower than the inflation adjusted peak of about $2,200 per ounce. Spot gold also reached a record.

"Large funds and specs continue to buy and hold into this gold rally, and I believe that you will continue to see the trend of long gold, long crude continue throughout 2008," said Zachary Oxman, a senior trader at Wisdom Financial.

"Geopolitical worries are still forefront in traders' minds along with continued dollar weakness," Oxman said.

The dollar was mixed, as investors weighed weak home-sales data against remarks from a U.S. Federal Reserve official suggesting he wouldn't support a deeper cut to interest rates.

The dollar index, which tracks the performance of the greenback against a basket of other currencies, edged down 0.1% to 76.095. See Currencies.

"Gold's strength is likely due to buying on inflation hedging, credit crisis risk and general macroeconomic and geopolitical risk," said Mark O'Byrne, director of Gold and Silver Investments Ltd., in a research note.

"The incident in the strategically vital Strait of Hormuz highlights that geopolitical risk remains heightened," he said.

Five Iranian speedboats harassed three U.S. Navy ships over the weekend in the Strait of Hormuz, according to media reports. The Iranian boats approached the U.S. vessels and threatened in a radio transmission to blow them up. The U.S. ships were about to open fire when the Iranian boats retreated.

U.S. Secretary of State Condoleezza Rice said that the actions of the Iranian boats were provocative and dangerous, while Iran described the event as "an ordinary occurrence," the BBC reported on Tuesday.

"Gold prices raced to a new record high this morning, with recession fears, a weak U.S. dollar, high oil prices and renewed geo-political tensions all factors supporting the precious metal," said analysts at Action Economics.

Crude-oil futures rose 2%, rebounding from their steep decline in the previous session, amid expectations for an eighth consecutive drop in U.S. crude supplies. See Futures Movers.

Also on Nymex, other metals futures posted strong gains. March silver rose 52.50 cents, or 3.4%, to end at $15.815 an ounce and January platinum surged $29.40, or 2%, to $1,553.60 an ounce.

March palladium rose $4.95 at $381.80 an ounce. March copper rallied 15.75 cents, or 5%, to end at $3.2985 a pound.