Gold prices surge to seven-year high

RENO, Nev. (AP) -- OPEC's surprise production cut, an unpredictable stock market and optimism that European banks will continue to horde bullion are leading investors to snap up gold.

The metal fetched its highest price in more than seven years during Thursday trading, flirting with $400 an ounce.

Gold closed in London at $390.45, its best showing since June 1996. It inched past $393 an ounce on the New York Mercantile Exchange before closing at $385.

"So far, that's played well for Nevada's gold miners," said John Dobra, an associate professor of economics at the University of Nevada, Reno, and director of the Natural Resources Industry Institute.

Nevada is the third largest gold producer in the world. Its total of 7.73 million ounces last year was surpassed only by Australia, which produced 9 million ounces and South Africa with 12.7 million.

Growing confidence among investors that the European Central Bank Agreement would be renewed was among the factors contributing to the price increase, Dobra said.

Under that pact, the banks have promised not to sell more than 400 tons of gold a year from their vast reserves. In fact, he said, the banks have largely stayed out of the gold market.

The surprise decision by the Organization of Petroleum Exporting Countries to cut production probably had little direct effect on gold prices, he said, but "more money in Middle Eastern hands tends to mean more gold purchases."

On the other hand, Dobra said rising energy prices have an effect on the mines because of their huge dependence on diesel and electricity.

"Nevada's mines have gone from among the cheapest producers in the world to the most expensive in the past couple of years," he said. "They've had big cost increases. Fortunately, we've seen bigger price increases."

Gold also is seen by some investors as a safe haven when the stock market declines. Though the market has shown signs of a rebound, stocks remain an unpredictable investment for many.

"It doesn't take much of a shift from the stock market ... into gold to have a big impact on the gold market because the gold market is really pretty small," Dobra said.

He said investors also are uneasy about the dollar's weakness against the euro.

Still, gold has climbed steadily in the past two years, almost oblivious to other factors. Prices increased through the dollar's ebb and flow against the euro and while the U.S. economy and the stock market rose and fell.

One analyst said earlier this week that he was baffled by gold's glitter.

"Gold prices should be down, and gold stocks should be down, but they keep going up," said John H. Hill, a former geologist turned vice president of equity research at Citigroup's Smith Barney investment division in New York.

Dobra said a continued improvement to $400 an ounce would not surprise him. That's a level not seen since March 1966.

"It clearly is a possibility. The fact that the central banks are so passive now means we're going to see more volatility in the market. That makes $400 all the more likely. Whether it will stay there, that's anybody's guess," he said.