Jan. 2 (Bloomberg) -- Gold futures rose, extending a seven- year rally to the highest price since 1980, as a weakening dollar and higher energy costs boosted demand for a hedge against inflation. Silver also gained.

Spot gold climbed to a record today, and crude oil reached $100 a barrel, the highest ever. Investors are pouring money into the precious metal as part of a commodity surge with the dollar under pressure from the prospect of more cuts in U.S. borrowing costs. In 2007, gold climbed 31 percent as the dollar fell to an all-time low against the euro.

``The dollar ran out of steam,'' said Ron Goodis, futures trading director at Equidex Brokerage Group Inc. in Closter, New Jersey. ``Oil is back on its horse. Gold is going to bolt.''

Gold futures for February delivery rose $22, or 2.6 percent, to $860 an ounce on the Comex division of the New York Mercantile Exchange, the highest closing price ever. The metal earlier reached $864.90, the highest for a most-active contract since Jan. 21, 1980, the day futures touched a record $873.

Gold for immediate delivery rose $23.50, or 2.8 percent, to $857.20 at 3:12 p.m. New York time after earlier reaching a record $860.10.

``Gold is leading us into uncharted territory,'' said Frank McGhee, head metals trader at Integrated Brokerage Services LLC in Chicago. ``Crude is making a run for $100, the dollar is headed lower, and geopolitical tensions are building. It's very possible gold can get to $1,000 this year.''

The dollar dropped as much as 1.1 percent against the euro, extending last year's 10 percent decline, after a report showed U.S. manufacturing unexpectedly contracted in December.

Commodities Climb

The Federal Reserve has reduced the overnight lending rate three times since Sept. 18, from 5.25 percent to 4.25 percent, on concern a housing slump will lead to a slowdown in the U.S. economy. The UBS Bloomberg Constant Maturity Commodity Index of 26 commodities rose 22 percent in 2007. The gauge was up as much as 2.2 percent today.

``The most salient buzzword in 2008 is going to be inflation,'' said Michael Pento, senior market strategist for Delta Global Advisors Inc. in Huntington Beach, California, which manages about $1.4 billion. ``The Fed is lowering interest rates and vastly increasing the money supply. They're further fueling inflationary expectations.''

Investment in the StreetTracks Gold Trust, an exchange- traded fund backed by bullion, surged 39 percent last year to a record 628 metric tons. Equities in the Asia, Europe and the U.S. fell today.

`Remaining on Edge'

``The move suggests that funds have made additional moves into bullion with Pakistan remaining on edge and investors nervous about financial markets,'' said Jon Nadler, an analyst at Kitco Minerals & Metals Inc. in Montreal.

Pakistan pushed back until Feb. 18 elections that may have returned the nuclear-armed country to democracy after eight years of military rule. Opposition candidate Benazir Bhutto was assassinated on Dec. 27.

Gold's gain last year was the biggest since 1979, when the price more than doubled after the Shah of Iran was overthrown, energy costs surged and the dollar slumped.

Silver for March delivery gained 37 cents, or 2.5 percent, to $15.29 an ounce. The metal rose 15 percent last year.

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

Last Updated: January 2, 2008 15:13 EST