By Melissa Pistilli—Exclusive to Gold Investing News

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After a stunning rally that brought prices to an all-time intraday high of $1266.50 an ounce last week, gold flipped the script early this week. A strong start Monday teased gold bugs with a high of $1263.70 an ounce, but prices soon quickly moved south to close at $1238.60 in New York.

The flight-to-safety crowd favored the Dollar and the Yen over precious metals and a stronger greenback placed further pressure on gold. Profit-taking off record highs and end of quarter selling also pushed prices down as investors traded gold for cash to make up for losses elsewhere.

The market’s initial reaction to the G-20 meeting in Toronto sent some investors to safe-haven gold, but pessimistic sentiments quickly faded. “We had built some risk premium into the market in front of the G-20 meeting,” said Sterling Smith, an analyst with Country Hedging. “The market is now shaving some of that.”

The precious metal looked to be extending its losses Tuesday morning as the dollar climbed and equities across the board took a hit after a serious correction in a leading indicator for China’s economy hit the wires. April growth in the Asian nation was earlier reported at 1.7 percent, which turned about to be a calculation error. A revision to 0.3 percent had a big impact on the markets this morning, especially in Asian and Europe.

However, after slinking as low as $1226.40 an ounce on the COMEX, the price of gold began to pare its losses by mid-day rising $20 an ounce in a matter of a few hours. The shiny metal overcame pressure from a stronger greenback to regain its safe haven allure as US equities continued to dive on depressingly weak consumer confidence and US housing market reports. Gold managed to hang on to most of its afternoon gains to close at $1241.80 an ounce in New York.

Whether gold can sustain price levels over $1250 an ounce in the short-term is debatable. “With the fear effect of concerns over developed-country debt and emerging-markets monetary tightening fading and a lack of fresh impetus, prices appear to lack the momentum to stay above $1,250,” said a report by Barclays Capital.

But medium to long-term forecasts remain bullish. Bayram Dincer, analyst at LGT Capital Management, puts prices at $1300 an ounce before September. Societe Generale sees the yellow metal reaching $1430 an ounce in the third quarter.

Gold Bubble Believable or Bunk?

Many bullish analysts point to plenty of support for higher prices coming from safe-haven concerns such as a stressed economic climate, ongoing sovereign debt problems and the threat of inflation.

It’s these concerns, rather than pure supply/demand fundamentals, that have brought prices 13 percent higher in 2010, which gives many an eternal pessimist (some may call them realists) reason to warn the gold market may be experiencing a bubble waiting to burst.

Michael Pascoe had an interesting piece on this touchy subject Monday in The Sidney Morning Herald. He dissects the latest Gold Bubble argument put forth by Rory Robertson, interest rate strategist at Macquarie Bank.

Pascoe, like Robertson, doesn’t try to cover his disdain for the “gold bug faithful,” which he describes as “a broad church that ranges from the inflation-fearful to the Armageddon brigade forecasting the end of civilisation as we know it.” His words, not mine. Don’t shoot the messenger.

And Robertson’s message is one of caution. In a small market like gold, which is based on a commodity that has no “running yield,” “no anchor, no firm benchmark for valuation,” the price becomes “whatever investors are prepared to pay.”

In his view, prices at today’s levels aren’t sustainable and he sees no reason to fear runaway inflation—the pretense for gold ownership—or  the collapse of the fiat money system as many in the gold bug camp believe is in the makings.

A circular logic exists amongst the Church of Gold, says Robertson. “Buy gold because the financial system might collapse. Gold has gone up in price, so the financial system must be in danger of collapsing because people buy gold when the financial system might collapse.”

Pascoe adds “peak” gold to the list of reasons used to justify rising gold prices. “Aside from inflation and civilisation’s collapse, ‘peak’ gold also gets a good run, the idea that the world is running out of gold. It’s not. At present prices, marginal deposits become viable mines and supply increases markedly.”

Tell that to geologist Brent Cook of Exploration Insights who in a recent article for The Gold Report gave a detailed explanation of the “dilemma” facing major gold miners today as they watch their production levels decline and juniors struggle to find legitimate exploration targets. Cook claims majors “are unable to sustain themselves” and are merely “surviving via old deposits that are running out of ore and newer deposits that are quickly headed into the ‘old’ deposit category.”

Other pragmatic analysts like Kitco’s Jon Nadler point to declining demand for physical gold from the world’s largest gold consumer, India, as a sign prices at today’s levels aren’t sustainable. Gold imports in to India declined for the third consecutive month and Mr. Suresh Hundia, head of the Bombay Bullion Association, says they could drop another 75 percent when the June 2010 tally is finalized and compared to 2009.

As gold prices rise higher, demand for physical gold in India drops as buyers turn to scrap. Waning demand from India can put a damper on rising gold prices. However, Bill O’Neill, a principal with Logic Advisors says that lower Indian gold demand has already been factored into today’s gold price for the most part. “There’s no question that jewelry demand is down,” O’Neill said. “That’s pretty much known in the market. It’s a minor factor.

Despite the naysayers, support for bullish sentiment in gold does exist; especially in Europe where investors are turning to the safe-haven of precious metals and driving gold to record highs in euros, pounds and Swiss francs. ”European investors’ demand for hard assets, particularly precious metals, continues to grow as they look to reduce their exposure to counterparty and currency-depreciation risks,” said ETF Securities managing partner Hector McNeil, in a report.

The World Gold Council sees gold prices gaining support from all areas of the marketplace from private investors and central banks looking to stock up on physical holdings to shareholders seeking greater positions in gold miners. “The backdrop is the continuing financial crisis and people’s desire to protect their wealth by investing in something that they believe is going to hold its value,” said the Council’s managing director Marcus Grubb.

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