(Editor's note: The following story originally ran on IndexUniverse.com's sister European site.)

It looks as though it may be third-time-lucky for gold. Its first two attempts to stay above the $1,000/ounce barrier, in early 2008 and 2009, ended in failure. But this time the price of bullion has exceeded the four-figure mark for nearly two weeks, and shows every sign of staying there. So, what are the yellow metal’s prospects from here on?

During a presentation at Tuesday’s Terrapinn ETF and Indexing Investments Europe conference in London, Daniel Brebner, head of metals research at Deutsche Bank, said that, although the bullion price is trading at a record level in nominal dollar terms, in real (inflation-adjusted) terms the metal is some way short of a record.

In a recent article published on UK website Market Oracle, Zeal LLC calculates that gold’s 1980 peak price of $850 equates to a current price of $2,358 when adjusted for the effects of U.S. consumer price inflation. In other words, there’s some way to go before we can talk about a real price peak.

According to Daniel Brebner and Deutsche Bank, there are three key factors that influence the price of gold: inflation, inflation volatility and the performance of the U.S. dollar.

While it’s a commonly held view that gold does best in inflationary periods, Brebner noted that the metal’s price performs well in both deflationary and inflationary environments, doing badly only under disinflation (i.e. moderating inflation). Since deflation is, by definition, a bull market in money against the prices of most other assets, gold attracts investors as the ultimate safe currency. Under inflation, gold is a hedge against money printing. It is only in periods with falling inflation and the resulting decline in risk premium, such as the years from the early 1980s to the turn of this century, that the bullion price faces a challenging environment, Brebner argued.

Recent inflation volatility also makes for a potentially bullish environment, said Brebner. While U.S. inflation has steadily declined since the early 1980s and has now fallen into negative year-on-year territory (when measured by the consumer price index), uncertainty about the future of inflation is probably increasing. With central banks printing money and intervening to prop up the financial system, the possibility of an inflation spike in the future is a concern for many investors, Brebner argued.

At the same time, the deflationists have a strong case too, he said, since broader measures of money supply are shrinking. Whichever way the inflation index ultimately goes, Brebner believes there’s a convincing argument to be made that uncertainty over future price levels – in other words, inflation volatility – is increasing. And that, he said, is bullish for gold.

Deutsche Bank’s metals team declined to give a central gold price forecast, but pointed instead to a range of future scenarios, which are, nevertheless, still skewed towards a higher bullion price. Under a scenario of moderating risk premium, low but contained inflation and a recovery from the financial crisis, the gold price in dollars could fall back to $650 per ounce, according to the bank. Under a less-benign environment, a rise in price to $2,500 could easily be on the cards, Brebner argued.

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