Gold futures closed higher Monday after Iran warned that U.S. actions could lead it to halt shipments of oil, sending crude prices sharply higher and creating a safe-haven bid for gold

Gold for August delivery closed up $7.70 at $648.70 an ounce on the New York Mercantile Exchange. On Friday, the contract gained $7.50 as the dollar fell sharply following a weaker-than-expected May jobs report.

"If you make a wrong move regarding Iran, definitely the energy flow in this region will be seriously endangered," Iran's supreme leader, Ayatollah Ali Khamenei, warned on state television over the weekend, the BBC reported.

The warning came just days after the permanent members of the United Nations Security Council and Germany reached agreement on a package of incentives to offer Iran in an attempt to persuade it to halt its nuclear research.

Tehran maintains it's aiming to create a civilian energy program, while western powers fear it is trying to create nuclear weapons.

The incentive package is part of a broader effort to solve the dispute diplomatically, but Khamenei's words suggest Iran has not ruled out some sort of U.S.-backed military action against it.

"They appear to be more inclined to outline how they will choke off oil supplies to the West, than how much they will heed the international community's offer of 'carrots or big sticks' coming their way on Tuesday," said Jon Nadler, investment products analyst at bullion dealers Kitco.com. "Now, it all comes down to how one interprets the words "wrong move" as relating to attempts to make the country comply with the will of the majority."

Meanwhile, Citigroup upgraded its gold-price forecasts, predicting that the metal will rally back through its recent peak above $730 an ounce as inflation fears persist.

"Following the current period of volatility and instability we expect investors to refocus on the previous concerns of continuing high oil prices leading to higher inflation, which would ultimately lead to higher interest rates and a subsequent slowing down of the U.S. economy resulting in a weaker U.S. dollar," said Jonathan Battershill, an analyst at Citigroup in Sydney. "All of these factors would result in stronger gold prices."

The dollar was last trading down 0.2% against the yen and down 0.3% against the euro.

Citigroup is now expecting average gold prices of $700 an ounce in 2007 followed by $750 in 2008.

Elsewhere in the metals sector, silver closed up 21 cents at $12.29 an ounce. Platinum rose $13.60 to $1,258.50 an ounce, and palladium rose $5.75 to $358.90 an ounce.

Copper recovered early losses to close up 1.4 cents at $3.60 a pound. The contract was hit by profit taking after Alan Garcia apparently won the Peruvian election over the weekend. Garcia's opponent Ollanta Humala had threatened to nationalize the country's natural resources, following a trend seen in neighboring countries.

Copper was also weaker after Freeport-McMoRan said it expects second-quarter copper sales at its Indonesia unit to fall 16% below forecasts. The company blamed the shortfall on the difficulty mining a small section of ore at one of its properties, which has abnormally high clay content.

On the supply side, gold inventories were lower by 195 troy ounces to 7.79 million troy ounces as of late Friday, according to New York Mercantile Exchange data.

Silver supplies fell by 226,850 troy ounces to 108.2 million, and copper supplies were down by 386 short tons to 9,092 short tons.