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Following an impressive decade-long run of consistent gains, has the price of gold reached its apex? Or, are the precious metal bulls taking a breather before stampeding to new historic highs in the months and years to come?

This question of where gold prices are heading tends to perplex the most accomplished of economists.

During a July 18 congressional testimony, Federal Reserve Chairman Ben Bernanke's admitted "that nobody really understands gold prices and I don't pretend to really understand them either."

The bears contend that the gold market inflated a bubble that burst when the gold price spiked to US$1,895 an ounce in September 2011, and we should expect to see the price continue to retreat to at least US$1,000 an ounce.

"The increase in the gold price in recent years - from $800/oz in early 2009 to more than $1,900/oz in 2011 - had all the features of a bubble. And now, like all asset-price surges that are divorced from the fundamentals of supply and demand, the gold bubble is deflating," according to Nouriel Roubini, an American economist noted for recognizing a bubble in the U.S. housing market and predicting its burst in advance of the collapse of 2008.

Those bullish on gold, however, argue that the recent declines are a normal correction in an otherwise 12-year trend of successive gains and anticipate that the current US$1,300-per-ounce-price may be the launching pad to larger gains when inflation takes its grip.

"I don't believe we have seen a bubble in gold, in fact, I do not believe we have seen the beginning of the bull market in gold," Novagold Resources Inc. Chairman Thomas Kaplan proclaimed during a meeting of shareholders at the end of May.

His bullish outlook is rooted in gold's long history of being a currency with limited supply.

"When you have an opportunity to own the only money that cannot be printed and the only one which has a two-, three-, four-, 5,000-year pedigree, that is a good bet," he added.

Unusual asset

"Gold is an unusual asset," Bernanke told Congress. "It's an asset that people hold as sort of disaster insurance. They feel if things go really badly wrong, at least they'll have some gold in their portfolio."

Roubini, who has become an icon for gold bears, questions the yellow metal's usefulness as a form of money in a modern society as well as its value as a safe-haven asset.

"A currency serves three functions: providing a means of payment, a unit of account and a store of value. Gold may be a store of value for wealth, but it is not a means of payment. Nor is it a unit of account. So gold remains John Maynard Keynes's 'barbarous relic', with no intrinsic value and used mainly as a hedge against mostly irrational fear and panic," he penned in an op-ed published by Project Syndicate in June.

The noted economist argues that during a time of crisis the price of gold can be highly volatile, an instability that was evident during the sharp during 2013.

"In an extreme credit crunch, leveraged purchases of gold cause forced sales, because any price correction triggers margin calls," he wrote.

These forced sales push gold prices lower, creating an avalanche that picks up additional margin calls as it plummets. This downhill slide was witnessed during the sharp drops in gold prices in April and again in June.

Bolstering his view that the metal is unreliable during times of global financial turmoil, Roubini said that highly indebted nations may be tempted to sell off their gold to pay down their monetary obligations.

He pointed to the recent events in Cyprus as an example. He said the very suggestion that this small island nation may need to sell its gold reserves to pay its debts was enough to trigger gold's US$200 landslide in April.

Recently, the European island nation has signaled that other options being considered to pay off its financial obligations would be preferable to selling any of its 13.9-million-metric-ton gold stash.

"The possibility of selling gold is known, but only as an option," Cyprus Finance Minister Harris Georgiades informed reporters on July 16.

A few days earlier, Cyprus President Nicos Anastasiades expressed his hope that there will never be a need for the island nation to sell its gold reserves.

While Cyprus' gold reserves are relatively small, investors worry that other financially strapped countries with much larger gold stashes could be tempted to dip into their reserves.

"Countries like Italy, which has massive gold reserves (above $130 billion), could be similarly tempted, driving down prices further," Roubini added.

At 2,451.8 million metric tons, Italy's gold reserves are the fourth largest in the world and dwarfs Cyprus' relatively small stash.

Inflation coming?

Kaplan's gold conviction does not rest upon the metal's reputation as a safe-haven asset, instead he and several of his fellow billionaires believe the unprecedented amount of money being "printed" around the world through monetary policies known as quantitative easing will drive down the buying power of fiat currencies, increasing the price of gold.

"Nobody in the history of the world has ever seen what we are experiencing now in terms of the re-evaluation, not to mention re-valuation, of money. All over the world people are printing money as though it has gone out of style," said the Novagold Chairman.

His view is echoed by fellow billionaire and Canadian mining magnate Frank Giustra.

"Nothing has changed on the fundamental side ... the behavior that caused this gold market in the first place is just intensifying with all this money printing that's going on around the world now," Giustra told the Globe and Mail following the plummet in gold price.

Despite an unprecedented amount of money being "printed," Roubini sees little risks of high inflation.

"If anything, inflation is now falling further globally as commodity prices adjust downward in response to weak global growth. And gold is following the fall in actual and expected inflation," explained the economist.

Bernanke said that gold's drop of US$400 an ounce, or 23.5 percent, since the beginning of 2013 may indicate that investors are less fretful about the potential of high inflation as a result of the aggressive monetary policies being implemented by his and other central banks.

"I suppose that one reason gold prices are lower is that people are less concerned about extreme outcomes, particularly negative outcomes, therefore they feel less need for whatever protection gold affords," said the Fed Chairman.

John Paulson - who amassed a fortune betting on subprime mortgages in anticipation of the collapse of the U.S. housing market - agrees that the lack of inflation has resulted in a lot of investors losing patience and selling gold.

Paulson has received a lot of media attention for the 65 percent decline in his PFR Gold Fund. According to Bloomberg, this US$300-million fund consists mostly of Paulson's own money and is the smallest at his firm, Paulson & Co.

The hedge-fund manager remains firm in his belief that inflation will be the inevitable outcome of the Fed's "money printing," and with that will come higher gold prices.

"We're at risk for having very high rates of inflation because of the amount of money that's been printed," Paulson said during a July 17 interview with CNBC.

"Gold admittedly is volatile, it has always been volatile, so … It's very difficult to predict price movement in the short term, but if you're looking for a hedge against potential inflation in the future and have a longer term view, I continue to believe it's an important part of anyone's portfolio," he added.

Gold outlook

So, what is the longer term view for the price of gold? The answers are as divergent as the views of the polarizing metal.

"At the peak, gold bugs - a combination of paranoid investors and others with a fear-based political agenda - were happily predicting gold prices going to $2,000, $3,000, and even to $5,000 in a matter of years. But prices have moved mostly downward since then," wrote Roubini.

The economist anticipates the "barbarous relic" will continue to drop toward US$1,000/oz by 2015.

Rob McEwen, founder and former CEO of Goldcorp Inc. and current CEO of McEwen Mining, has become renowned for his US$5,000-an-ounce gold prediction.

When Kitco News asked McEwen on July 17 if he is sticking to this bold forecast, McEwen responded, "We will go there and probably go beyond that. The reasons for people buying gold haven't changed - the debt levels in the western world have continued to increase; the monetary expansion is still there, debasing the currency."

Kaplan, who avoids the pitfalls of pegging an anticipated price to gold, did draw a parallel between the 1987 Black Monday crash of the Dow Industrial Average and the current gold market as an example of the potential.

After topping 1,000 for the first time in the early 1980s, the Dow climbed to 2,246 before making a 508-point, or 22.6 percent plummet, on Oct. 19, 1987.

Over the next decade, the DJIA witnessed a steep and steady rise to 10,000 and today is sitting at above 15,000, leaving Black Monday as an almost unperceivable blip on the Dow's long-term charts.

If gold made a similar percentage point gain from today's levels, it would top US$10,000 per ounce.

While the past performance of the Dow is not indicative of what gold might do in the future, Black Monday does serve to demonstrate that short-term price fluctuations, no matter how dramatic they may seem at the time, does not necessarily foretell the longer term outcome.

Since hitting a low of US$1,192 per ounce on June 28, gold rebounded to US$1,295 by July 19 and rallied a further US$38 to US$1,333 on July 22.

Time will tell whether the gold bulls have resumed their run or if this is just another sign of the extreme volatility predicted by those bearish on the outlook for this unusual asset.

Author Bio

Shane Lasley, Publisher

Over his more than 16 years of covering mining and mineral exploration, Shane has become renowned for his ability to report on the sector in a way that is technically sound enough to inform industry insiders while being easy to understand by a wider audience.

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