updated 5/11/2006 3:33:05 PM ET 2006-05-11T19:33:05

Gold prices surged to a new 26-year high above $725 an ounce Thursday on inflationary worries expressed by the U.S. Federal Reserve.

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Persistent concerns about Iran's nuclear ambitions also lifted the metal, which is viewed as a hedge against currency weakness, inflation and geopolitical instability.

The June gold contract rose as high as $728 an ounce Wednesday on the New York Mercantile Exchange, its strongest level since early 1980. It eased back to settle at $721.50, up $15.80 on the day.

The dollar fell against other major currencies Wednesday, erasing earlier gains after the U.S. Federal Reserve lifted interest rates to 5 percent and left the door open for further hikes.

Gold investors focused on the inflationary fears expressed in the Fed's statement and on the possible inflationary impact of surging prices of crude oil prices and industrial metals, traders and analysts said.

"Inflationary expectations seem to be rising in the U.S. and you could argue some of those expectations are coming from rising commodity prices," said Robert Rennie, chief currency strategist for Australia's Westpac bank.

Gold continues to garner support from concerns over the implications of a showdown between Iran and the U.S. over Tehran's nuclear ambitions.

At the same time, speculation that China and other Asian countries may be turning to gold as a way to reduce their foreign reserve holdings — mostly denominated in dollars — on a weakening U.S. dollar is also spurring investor sentiment, participants said.

"With all the rumors still about of China and the Iran issue still playing on people's minds, the dollar's not really driving gold at the moment," said Darren Heathcote, trading head at Rothschild Australia.

"The pure weight of funds going into commodities is driving prices, not just fundamentals," he said.

The all-time record for gold was set in January 1980 when it hit $875 an ounce in a huge day-and-a-half surge. But it quickly fell back under $700.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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