Gold futures closed higher Thursday, as escalating violence in the Middle East sent oil prices to record levels, although gains were capped by continued dollar strength.

Gold for August delivery closed up $3.20 at $654.40 an ounce on the New York Mercantile Exchange. The metal has gained 15.2% in the last month.

Other metals prices were mixed. September silver dropped 7 cents at $11.485 an ounce and October platinum declined $3.60 at $1264.00 an ounce. September palladium rose $4.10 at $334.05 an ounce and September copper added 1.15 cents at $3.6765 a pound.

The flaring of violence between Israel and Lebanon sent crude oil futures to record highs and gave a boost to gold, while the U.S. stock market tanked. Over the last few days, deadly train bombings in India's financial center Mumbai and political developments surrounding Iran's and North Korea's nuclear ambitions have fuelled demand for gold, the traditional safe-haven investment. Thursday's rise in gold, however, was modest compared to those of the previous days.

"Record oil prices have failed to propel gold and the other precious metal through the highs seen yesterday, as dollar-driven profit taking continues to cap the market," said James Moore of TheBullionDesk.com.

"For now, traders seem happy using rallies to lock in profits," Moore said. "However, given the rather unstable political picture globally, further safe-haven driven price spikes can't be ruled out."
Haven from conflict

On Thursday, Israel bombed Beirut's international airport and imposed an air and sea blockade on Lebanon in response to the kidnappings of two Israeli soldiers along the Israel-Lebanon border by Hezbollah on Wednesday. Raids on targets across southern Lebanon have killed at least 35 civilians, including children, the BBC reported. In response, Hezbollah militants fired rockets at the Israeli port city of Haifa, according to media reports.

"Israel's attack on Lebanon once again reveals just how fragile the situation in the Middle East really is and how isolated events can escalate into regional conflicts literally overnight," said Jon Nadler, an analyst at Kitco.com.

"Safe-haven buying of gold continues to play an important role in its current price equation, as much as some market critics would attempt to downplay the cause-and-effect factor or durability of crisis-induced rallies," he said.

Israel's offensive against Lebanon comes as it continues a separate operation in the Gaza Strip where another Israeli solider was taken hostage. About 71 Palestinians have been killed in that operation.

On Wednesday, the U.S. blamed Syria and Iran for the kidnappings of the two soldiers. Meanwhile, Russia condemned Israel for its "disproportionate use of force" and for causing damage to civilian infrastructure in the Palestinian territories and Lebanon.

Elsewhere in the Middle East, Iranian President Mahmoud Ahmadinejad said Thursday that his people "will not give up their right to exploit peaceful nuclear technology," the Associated Press reported.

Ahmadinejad's statement came after six of the major world powers agreed Wednesday to seek a United Nations Security Council resolution that would require Iran to stop uranium enrichment. The five permanent members of the Security Council and Germany will seek sanctions against Iran if it fails to comply with the resolution.

"Gold's recent rise back into positive pricing territory can be attributed to a number of factors, though chiefly the sharp rise in geopolitical uncertainty seen across the world," said Matthew Parry, an economist at Moody's Economy.com. "If it's not Israel, then seemingly it's Mumbai, North Korea, Nigeria or Iran."

Parry said that he remains bullish about gold prices in the short- to medium-term on the assumption that global political tensions are unlikely to ease any time soon.
Oil sets a record

Crude for August delivery climbed as high as $76.85 a barrel, an unprecedented peak in a front-month contract on the New York Mercantile Exchange. The contract was last up $1.70 at $76.65 a barrel. Front-month prices are trading 25% higher year-to date.

"It seems that oil is destined to hit $80 before the end of July and maybe even higher should tensions erupt abruptly," said Kevin Kerr, editor of Global Resources Trader, a newsletter published by MarketWatch. "The United Nations will have a full slate of activity trying to negotiate all of the hot spots on the planet right now."

Kitco's Nadler said: "Nobody wants global chaos, but how else can they currently look at the gold market but from the long side? If $76 or $80 oil is in the cards, then why not $680 or $700 gold?"

On the supply side, gold inventories were unchanged at 8.03 million troy ounces as of late Wednesday, according to Nymex data.

Silver supplies rose by 2,930 troy ounces to 101.9 million and copper supplies were unchanged at 7,796 short tons.

In Chile, the union at the Escondida mine said that copper production has fallen after workers began to enforce strictly safety procedures, said John Clemmow of Investec Securities in a Thursday note to investors. BHP Billiton owns 57.5% of Escondida, which produces 7% of the world's copper. The union has threatened a strike if BHP didn't agree to its wage demands during the August negotiations of a new contract.

"The biggest risk factor for metals is on the production side," said Lawrence Roulston, editor of the investment newsletter Resource Opportunities. "For example, the Grasberg mine in Indonesia having political problems or miners in Chile going on strike."

One of the largest in the world, the Grasberg gold and copper mine in Papua, Indonesia, is owned by the American mining company Freeport-McMoRan Copper & Gold Inc.

The Indonesian government has threatened Freeport with legal action if the company doesn't take measures to better protect the environment. The local population has also protested against the mine, arguing that it wreaks environmental damage while providing little economic prosperity to the locals.
Supply gap

"The metal markets are driven by demand exceeding the ability of the mining industry to deliver metal," Roulston said. "Speculators are adding froth, but are not impacting the long-term trend, which is still very strong."

Anglo Platinum, the world's largest primary producer of platinum, said yesterday earnings per share for the first half of 2006 are expected to be between 110% and 120% higher than earnings for the same period a year earlier. Higher metals prices and increased sales volumes were the primary reasons for the increase in earnings, the company said in a statement. Mining company Anglo American plc owns about three quarters of Anglo Platinum, which will release its half-year results on July 31.