With oil soaring to new highs and the U.S. dollar back down, investors are looking to the usual haven: gold.
Prices for gold, much of it mined in Africa, are hitting new 26-year highs, letting mining companies post surging revenue as they search for new ways to extract every nugget from the ground. Yet they say they can't substantially increase production — a limitation that could keep prices high for years.
Compared to oil, increasing gold supply is a much more costly — and lengthy — process.
"Gold mining is not the kind of situation where just because of the higher price you can turn on the tap and get more gold the next day," said Vince Borg, a spokesman for Barrick Gold Corp. — the world's largest gold producer.
Newmont Mining Corp. President Pierre Lassonde said the company would need two to three years to increase exploration and cannot quickly increase supply at existing mines.
"We wouldn't change our budget based on six months of price movement," Lassonde said by e-mail.
Gold has jumped from about $450 an ounce in November to $732 in electronic trading Friday on the New York Mercatile Exchange, a surge analysts attribute to investors looking for a safe asset amid worries about Iran's nuclear program, a weak dollar, and inflation tied to high oil prices.
A.G. Edwards analyst Dan Vaught said the price tends to be driven by investor beliefs about the stability of financial markets.
"If you think the world's going to end, you buy gold," Vaught said. "It protects against a major breakdown in equity markets."
Jeffrey Christian, managing director of commodities research firm CPM Group, said the investor-driven model means prices could also dive quickly if political tides shift — regardless of actual demand for the metal.
"Gold prices can stay high as long as the world seems to be going toward World War III," Christian said. "If investors decided that the world was becoming a less treacherous place, gold could fall very sharply." He said that jewelry demand for gold has actually shown signs of weakening as the metal has gotten more expensive.
But right now, mining companies say they're optimistic that the difficulty of increasing overall gold supply can keep those soaring prices high.
"Demand is strong yet there is no ability to increase production," said Lassonde, who predicted that gold will top $850 in the next 12 to 18 months.
Mine production in 2005 was only 1 percent higher than in 2004, despite a number of new mines in recent years, according to the World Gold Council, an industry group.
Johannesburg-based Anglogold Ashanti Ltd., one of the world's largest producers, said in March that its production actually declined in the first quarter, dropping 10 percent to 1.34 million ounces because of lower ore grades and fewer production shifts. The company has predicted that its 2006 production will be slightly lower than in 2005.
Mining companies have a plan for every deposit that is "fairly inelastic," said Desjardins analyst Michael Fowler. "That doesn't change much with the gold price."
The high cost of excavation, Christian said, is a key difference between gold and black gold.
"Once you've discovered an oil field, the cost of bringing it in is very low," Christian said. "If you look at the gold industry, it's the exact opposite. Once you've found it, you have to build a mine."
Mining and trucking out ore also consumes a substantial amount of fuel, said Barrick's Borg. "Higher oil prices have meant higher costs of operations," he said.
More expensive steel and tires also threaten to cut into mining companies' profit margins — though those costs have so far been offset by the skyrocketing gold price.
"Our margins have expanded," Borg said. "But nonetheless our costs have gone up." Barrick said last week that its earnings tripled in the January-March quarter from a year ago, citing the surge in selling prices and added production from its $10 billion acquisition of Placer Dome.
Mining stocks have climbed along with the price of gold: Barrick shares are up more than 20 percent for the year, while Anglogold is up about 15 percent and Newmont about 9 percent. American depositary shares of Australian miner Rio Tinto Group have jumped 35 percent this year. In Friday trading, all saw their shares slip about 3 percent.
Fowler cautioned that mining companies' existing operations won't necessarily rake in record profits from the price surge.
"It's not such a cash-rich industry," he said. "I would expect that we'll start to see mergers and acquisitions happen. We've seen some; I think we're going to see more."
Barrick became the largest gold producer just three months ago with its purchase of Placer Dome, which followed on Toronto-based Goldcorp Inc.'s acquisition of Wheaton River in 2005. Barrick Friday closed on the sale of $1.6 billion in Placer Dome assets to Goldcorp, including four mines.
Still, the higher prices are giving companies more options. Fowler said it is now profitable to mine lower-grade ore that might have been left in the ground a couple years ago. And Anglogold said it is considering extending the life of some of its South African mines.
"There are gold deposits as deep as five kilometers (three miles) underground," spokesman Steve Lenahan said. He said Anglogold's research has shown that it would be viable to dig that deep "in a certain type of price environment."
He did not say what price would make such a dig realistic, but did say the company is seriously considering the project. Anglogold Ashanti already operates the world's deepest mine at just over two miles.
Meanwhile, Newmont expects to start producing gold from a 621-square-mile mine outside of Ghana's capital of Accra in the second half of this year and Barrick is increasing its exploration budget.
But Barrick and Anglogold caution that any expansions won't take effect for years.
Metal prices seem set to remain volatile, said A.G. Edwards' Vaught. "Where gold prices might stabilize or how high they might go, there's no knowing."