(FORTUNE Magazine) – ANXIETY WAS RIFE. The Soviet Union had just invaded Afghanistan, the Ayatollah Khomeini was consolidating control in Iran, and U.S. inflation was in double digits. It was January 1980 and the price of gold, like hair standing on end, spiked for a few hours at a record $875 an ounce on the New York Commodity Exchange. That quote soon dropped (the world adjusts to fear), but gold's price remained lofty enough to set off a global scramble. Prospecting was especially feverish in the U.S. and Canada. The surprising result today: What was once virtually a cottage business in North America is growing quickly into a world-class industry. With the help of efficient methods -- which often extract a mere ounce or two from 100 tons of low-grade ore -- the U.S. and Canada together will produce 7.2 million troy ounces of gold this year, nearly triple the 1980 figure and almost a fifth of the non-Communist world's production. North America's relative upstarts in the gold game are moving up fast. By 1989, Newmont Mining of New York is likely to become the largest producer outside South Africa and the Soviet Union. Placer Dome of Toronto is turning into another heavyweight. Other companies, many less than five years old, are growing fast through exploration and a wave of mergers. Marvels Gordon Parker, Newmont's chairman: ''It's only recently begun to dawn on me the magnitude of what's happened to the North American gold industry.'' GOLD PRODUCTION is climbing just about everywhere but in South Africa, still the leading source by far. The non-Communist world produced a record 38.6 million troy ounces last year, up nearly 30% from 1980, according to CPM Group, a precious-metals consulting firm in New York. (A troy ounce, traditionally used for gold, weighs 10% more than the familiar avoirdupois variety.) Now the world's No. 4 producer, right behind third-ranking Canada and gaining, the U.S. will produce 3.3 million ounces in 1987, vs. a mere million seven years ago. Production in Australia and Brazil, where many North American mining companies have interests, has risen sharply. Half the production in the non-Communist world today comes from outside South Africa, up from less than 30% in 1980. Somewhere down the road, all that new bullion could be bearish for gold's price. But lately, with the price creeping past $470 an ounce on a new outbreak of inflation worries, gold has been worth well over twice what it costs to produce. The widening gap between production cost and price, as well as turmoil in South Africa, has set off a financial gold rush on Wall Street. Shares of North American gold mining companies have shot up -- some now sell for 50 times their fast-growing earnings or more -- and T. Boone Pickens has made a multibillion-dollar pass at Newmont. More raids may be coming. With gold stocks so hot, says John Lydall, mining analyst at First Marathon Securities in Toronto, ''It wouldn't surprise me to see more fellows like T. Boone Pickens.'' THE SLUMP IN copper and other base metals greatly abetted the new quest for gold. Mining companies, says Mark Lettes of Amax Gold Inc., ''had people with wonderful talents for finding stuff and getting it out of the ground profitably, but they had nothing left to look for. So they looked for gold.'' The companies found they could produce the metal for substantially less than the market price, even when the price tumbled all the way to $284 an ounce in early 1985. According to the Metals Economics Group, a research firm in Boulder, Colorado, the average U.S. cost of mining gold has fallen from $236 an ounce in 1984 to $200 last year, but is likely to level off this year. For the most part, the companies did not accomplish this feat through dazzling technological breakthroughs but through dogged, incremental advances in techniques that have been around for years. For example, they bought bigger trucks that can haul more ore. They also increased the capacity of crushing machines and automated the process by which bits of gold are separated from ground-up ore. Nature was kind to the Canadians. Their ore, mostly deep underground, is expensive to dig. But it is relatively rich, typically with 0.2 ounces of gold to the ton, and this offsets the high mining cost. In the U.S. by contrast, the gold is ''disseminated'' in the ore, like specks of dust, with as little as 0.02 ounces per ton. But the rock, which is close to the surface, can be blasted loose inexpensively in open-pit mines. Surface mining is the rule in a region called the Carlin Trend in northern Nevada, perhaps the most lucrative gold province outside South Africa, which has at least 20 million ounces of reserves sprinkled over 38 miles. The advantage of less expensive mining would be lost, however, if there were no efficient way to exploit the low-grade ore. Fortunately, there is: a remarkable procedure called heap leaching, known for centuries but introduced to gold mining over the past decade. A wasteful technique when used with rich ore, the process recovers only 70% of the gold, vs. as much as 90% with conventional methods in which the ore is ground up. Heap leaching makes economic sense because it eliminates this costly step. Baki Yarar, a metallurgical engineering professor at the Colorado School of Mines, compares heap leaching to separating a pinch of sugar from a vast patch of desert. First, bulldozers push the ore onto a football-field-size mat lined with asphalt or plastic. Then workers with hoses spray a cyanide solution onto the pebble-size rocks. A slurry of gold and other minerals trickles out the bottom, and then passes through a system of carbon filters. Newmont's gold mines move a lot of rock: about 112,000 tons a day, counting what has to be moved aside to get at the ore. That's enough to fill a line of 100-ton trucks nearly eight miles long. The rock moving pays. Next year, according to William Siedenburg, a precious-metals analyst with Smith Barney, earnings at Newmont Gold, a subsidiary 90% owned by Newmont Mining, should rise 53% to $136.3 million on revenues of $400 million. R. Douglas Moffat of Fahnestock & Co. predicts that earnings at Canada's American Barrick Resources, which will hit $22.3 million this year on sales of $95.6 million, will triple over the next three years. NOW THAT THE companies have pared costs, says Michael Chender, president of Metals Economics Group, they have shifted priorities to becoming bigger players. The result, according to Siedenburg, has been a flurry of mergers, acquisitions, and spinoffs in the past three years. The most prominent battle is between Newmont Mining and the investor group led by Pickens. The hostile takeover, valued at $2.7 billion, is dead in the water for now, with Consolidated Gold Fields, Newmont's biggest holder, coming in as a white knight to buy 49% of Newmont's shares. Pickens's lunge, security analysts say, stampeded Newmont into accelerating its already aggressive expansion plans. As recently as April, Newmont was planning to raise its production, concentrated in its Carlin Trend properties in Nevada, from 585,000 ounces this year to 890,000 in 1989. Following the August bid by Pickens, Newmont announced that it would be mining 1.4 million ounces by 1989 and 1.6 million by 1990. That would put Newmont ahead of Homestake Mining, the U.S.'s longtime leader, most of whose ore is mined below ground in the Black Hills of South Dakota. ''When this massive exogenous event comes along,'' Newmont Chairman Parker says in reference to Pickens, ''you want to be quite sure that shareholders know the full value of the company.'' The merger that created Placer Dome may also have been born of takeover fears, although Chairman Fraser Fell and President John Walton don't put it that way. They say the August merger of Placer Development, Dome Mines, and Campbell Red Lake Mines ''made sense'' because of a pooling of mining expertise. Other companies are growing quickly through acquisition or expanded production. Among them are Canadian companies like American Barrick (1987 projected production: 240,000 ounces) and Echo Bay Mines (more than 480,000 ounces); and U.S. companies like Battle Mountain Gold (260,000 ounces) and Amax Gold (150,000 ounces). AS GOLD STOCKS have streaked skyward, some mining companies have dropped out of the acquisition spree. Others, however, believe that the high stock prices virtually dictate more takeovers. William White, who specializes in precious metals investment banking for Merrill Lynch Canada, notes that Placer Dome, for one, has a market valuation of $5,000 per ounce of annual production capacity. Medium-size North American companies trade at less than $3,000 per ounce, he says. As long as that disparity exists, White contends, it pays big, highly valued companies to issue shares and take over smaller companies, cheaply raising capacity and getting their hands on more reserves. White believes that perhaps 40 or so medium-size North American companies with annual production of 50,000 ounces or more will get bought for $100 million or more apiece. The industry does not plan to grow by acquisition alone. Metals Economics Group estimates that it will spend $300 million on exploration this year. While the gold dust has yet to settle in North America, South Africa's huge production is declining. The country's mines will produce about 19.5 million ounces this year, down 5% from 1980, according to CPM Group. The Gold Institute, an industry organization, says that South Africa has seven companies that produce more than a million ounces; the largest, Free State Consolidated, can produce a staggering 3.7 million. But South Africa's mighty underground mines, rich with high-grade ore containing up to 0.4 ounces of gold per ton, are continually threatened by racial strife. This year a bitter walkout by the company's predominantly black labor force hobbled mining operations for three weeks. IN THE SOVIET UNION, production volume, costs, and methods have been state secrets since Stalin's time. According to CPM Group, gold production has risen slowly, to an estimated nine million ounces in 1986. What counts with the Russian Bear is not annual production but sales from the country's gold hoard. Hurt by low world oil prices and intermittently by poor harvests, the U.S.S.R. sells gold to raise quick cash. It sold perhaps ten million ounces in 1986, far more than the 1.3 million ounces it sold in 1983. The Chernobyl nuclear disaster, which rained radiation on farmland, forced the Soviets to import more food, partly paid for with gold. Jeffrey Christian, CPM's managing director, predicts that continuing economic troubles will bring continuing heavy sales. With Soviet sales and non-Communist production up, does the world face a ) price-dampening glut? Not necessarily. In the strange world of gold, the amount produced is only one of the factors affecting the price. Gold is not burned up, like oil, or scattered in dumps like much of the world's base metals. All the gold ever mined, whether it's in teeth or Tiffany's or the Treasury, adds up to about 99,000 tons, according to the U.S. Bureau of Mines -- enough to make a cube just 18 yards square. Most of it is still around and, to the extent its owners decide to sell, can influence the price. Gold production in the non-Communist world last year totaled less than 1,300 tons, about 1% of the total stock. THE TOTAL supply of gold that came on the market last year, including everything from recycled jewelry to Soviet sales and new bullion from North American mines, was 64.1 million ounces, up 16% from the year before. Jewelry makers took half of that and industry, which uses gold in electronic circuitry, another 10%. As it turned out, the declining share going to these two users did not matter. Investment -- in coins, bullion, and medallions -- more than took up the slack. CPM Group estimates that investor demand will remain strong this year, taking about 40% of the gold coming on the market. One reason for the growing investor interest: It's a lot easier to own gold than it used to be. Gold coin sales have rocketed. Last year, for example, the Japanese minted the Emperor Hirohito commemorative coin, consuming 6.4 million ounces. Similar mintings in the U.S. and Australia are also doing well. The price investors are willing to pay for gold, and hence the market, is influenced heavily by psychology rather than economics. If anxiety rises, investors want more. Anxieties can ebb, of course, as they did in the years when inflation was declining sharply and the gold price turned leaden. North American mining executives do not appear to be having nightmares about this possibility. If anything, they are more concerned about keeping production high in the future. Many of the new low-grade mines play out quickly, in ten years or less. Parker of Newmont, who helped buy the Carlin Trend properties in Nevada, is confident the mining companies can find the new gold deposits they need. Like most others in the industry, Parker expects gold to stay well above $400 an ounce, leaving a fat margin for the industry's new giants. If the price dropped, say, to $350 an ounce, some speculators might suffer palpitations. But the Gold Diggers of 1987, to hear them tell it, would not even break into a sweat.

CHART: NOT AVAILABLE CREDIT:NO CREDIT SOURCE: COMMODITY EXCHANGE, METALS ECONOMICS GROUP CAPTION: Glittering Margins As gold prices rose in the past three years, U.S. production costs dropped. The Newmont worker is pouring molten gold to form 850-ounce bars. DESCRIPTION: United States and world gold production costs; price of gold, 1982-Oct., 1987.