Oct. 15 (Bloomberg) -- Gold rose to the highest since 1980 as record energy costs and a weakening dollar boosted the appeal of the precious metal as a hedge against inflation. Silver declined.

Bullion extended its rally after crude-oil futures rose to a record $85.74 a barrel today, as tensions mounted between Turkey and Iraq, which has the world's third-largest petroleum reserves. The precious metal reached a record in January 1980 after oil doubled in a year.

``Oil is at a record high, and in the face of a slumping dollar, you've got a recipe for gold to shoot higher,'' said Matt Zeman, metals trader at LaSalle Futures Group Inc. in Chicago.

Gold futures for December delivery rose $8.40, or 1.1 percent, to $762.20 an ounce on the Comex division of the New York Mercantile Exchange. The metal earlier reached $765.40, the highest for a most-active contract since Jan. 22, 1980, the day after the price reached a record $873.

Silver futures for December delivery fell 4.8 cents, or 0.4 percent, to $13.855 an ounce on the Comex. The metal is up 7.1 percent this year.

Gold is up 19 percent this year, heading for the seventh straight annual gain, as the dollar dropped to an all-time low against the euro. Five of the past six bear markets in the dollar have resulted in a higher gold price.

`Perfect Storm'

``Gold is in this perfect-storm environment that gets it to higher prices,'' said Peter Marrone, chief executive officer of Yamana Gold Inc. ``It's inflationary pressure, rising oil prices, the weakening dollar, and supply and expanding demand for gold. From all these points of view, I think gold will stay strong.''

Some investors bought futures after spot gold rose above $750 for the third straight session and the dollar index fell below 78. Against a weighted basket of six major currencies, the dollar dropped to 77.939. It reached 77.657 on Oct. 1, when the U.S. currency fell to an all-time low against the euro.

``The dollar continues to weaken,'' said Dennis Gartman, economist and editor of the Suffolk, Virginia-based Gartman Letter, who recommended clients buy gold last week. ``Crude oil and other commodity prices continue to rise. And under those circumstances, gold shall continue to move from the lower left to the upper right on the charts.''

Euro Climbs

The dollar fell against the euro on speculation interest rates in Europe will rise faster than in the U.S. The Federal Reserve on Sept. 18 lowered its benchmark rate by 0.5 percentage point to 4.75 percent, sending the dollar lower against the euro. The euro traded as high as $1.4243 today after reaching a record $1.4283 on Oct. 1.

``Freer money is driving gold higher,'' said Carlos Perez- Santalla, a gold trader and president of Hudson River Futures in New York. ``The dollar is weak, and oil is higher. The Fed cut has started to goose things higher as far as inflation is concerned.''

Investment in the StreetTracks Gold Trust, the exchange- traded fund backed by bullion, has risen 140 metric tons to a record 593 tons this year. Compared with central banks, the fund would be the 11th-largest holder of gold after China, which has about 600 metric tons in reserves.

To contact the reporter on this story: Pham-Duy Nguyen in Seattle at pnguyen@bloomberg.net.

Last Updated: October 15, 2007 14:18 EDT