Earlier this month, gold prices hit an all-time high, as the yellow metal fetched more than $1,240 an ounce. Yet gold bugs still think the price can hit even higher highs, back to the nearly $2,000 per ounce figure hit in the 1980s, on an inflation-adjusted basis. That could spell further gains for gold mining stocks such as Barrick Gold (NYSE: ABX), Newmont Mining (NYSE: NEM) and AngloGold Ashanti (NYSE: AU). To see where gold may be headed, we need to take a look back.

Off the Gold Standard

Ever since the U.S. government moved to no longer back its currency in 1973 with gold reserves, there has always been a small army of investors who expected the Federal Reserve to use its unfettered powers of the printing press to create too much cash and invite ruinous inflation. And with government increasing its debt obligations for each of the past ten years, there is real reason for concern. That’s because Uncle Sam will eventually have only two options to solve the fiscal mess. Either start to generate fiscal surpluses through a combination of higher taxes and less government spending. Or accept higher interest rates on any future bond offerings, which would likely lead to the rising inflation that many gold bugs expect.

To be clear, those inflation fears have not yet come home to roost. In fact, inflation steadily declined in the 1990s and has remained firmly in check in this last decade. Simply put, gold has to be seen as a hedge against “potential” inflation. And since gold has risen from less than $400 per ounce in 2002 to more than $1,200 today, it’s fair to wonder if any eventual spike in inflation has already been accounted for. In fact, the only justification for gold to reach $1,500 or even $2,000, as some anticipate, is if inflation not only rises but starts to spiral out of control. And that just doesn’t seem likely in a world where many central banks have learned crucial lessons about fighting inflation.

The recent further gains in gold are coming from other factors. Unrest in the Korean Peninsula, along with economic concerns in Europe, are pushing up gold prices, decoupling the trade from the long-standing inflation fears. If the Korean threat abates, or European concerns recede, so will gold prices. So this may be a time for profit-taking for those buying gold on the rising inflation thesis.

Action to Take –> For most investors, it’s best to find an industry that appears undervalued or overvalued, and then find the company that is best-positioned or worst-positioned for growth (depending on whether you are going long or going short). But in the case of gold, there are many other factors to consider when you go long or short an individual gold company, including extraction costs, hedging strategies, and depletion rates. You can capture much greater upside or downside, and avoid all those other factors, by playing the exchange-traded funds that often employ leverage and magnify returns – in a bullish or bearish fashion.

For example, the ProShares UltraShort Gold ETF (NYSE: GLL) bets against gold, rising or falling at twice the rate in the opposite direction of the yellow metal. During the past year, that fund has lost half its value in the face of steadily rising gold prices. If we see profit-taking in gold, then this fund should post a decent gain.

Conversely, if you think gold has more room to run and large government deficits will inevitably lead to high inflation, then the Market Vectors Gold Miners ETF (NYSE: GDX) might be the play. Of course, you can also simply acquire gold itself, and tuck it away in your safe-deposit box. But you should surely steer clear of any television pitches that highlight gold’s luster. Most of the time, these firms exist to extract high fees from investors, lining the pockets of their pitchmen.