The rising gold price has gone through disbelief, acceptance and now optimism. The next stage, according to DundeeWealth Inc chairman Ned Goodman, will be euphoria, leading to the mother of all bubbles.

Though the veteran fund manager was speaking to a group of analysts about the bullish phase of the North American stock market, he is not far from the truth with his comments on gold.

For, discussions of a gold bubble are beginning to make their way through the marketplace.

Google has reported numerous hits for a search on gold bubble Nov 2009. Financial writer and frequent television guest Dennis Gartman also concurs: It is a gold bubble and to say otherwise it'd be naïve.

He called the trade on the precious metal: mind boggling and unbelievably crowded, but also said he is currently long - or betting gold will go higher.

Agreed, it has always been a contentious issue what the true value of gold is and how to measure what its price level should be.

Clearly, a bubble is a deviation between price and fair value of an asset. Because fair value is to some extent a matter of opinion, identifying a bubble involves opinion as well.

There are various widely accepted methods for valuing assets, but these methods use inputs that involve judgment and opinion. Stocks, on the other hand, can be valued on the underlying earnings or the balance sheet of the issuing corporation.

So, are they the best measure? At this juncture, would it make sense to hold on to physical gold or favor companies with good cash flow and gold reserves? If gold keeps rising, wouldn't these companies be in a better position to pay significant dividends?

Don't forget: There is a simple theory that when the price of gold increases, then gold mining share prices will follow.

However, there is a major drawback to this theory. For, many mining firms sell their future production years in advance. This gives them a guaranteed income but means that their shares may not be very responsive to movements in the gold price.

Historically, shares in mining companies have always proved to be risky. But if you are the investing types and have a healthy risk appetite, read on.

Miners gain

On Monday, the most active New York gold contract charted a new high of $1,174 an ounce. On the Toronto Stock Exchange on Monday, Canadian gold miners closed higher, as record gold prices provided a fillip for mining stocks.

Kinross Gold Corp (CA:K 20.70) shares gained 1.5 per cent, Yamana Gold Inc (CA:YRI 14.40) added 1.8 per cent, and Eldorado Gold Corp (CA:ELD 14.43) gained 0.2 per cent.

Mining companies led the TSX Composite's gains as gold futures hit new record highs of $1,174 an ounce, buoyed by a retreat in the US dollar after a senior Fed official said the country should continue buying mortgage-backed securities, past the first quarter of 2010, or longer than planned.

So, what is it to be?

Groping in the dark

Clearly, gold bugs have been attracted by the solidity and portability of the metal versus paper currencies. But some portfolio fund managers have been showing the way.

Most of them are fully invested in mining shares or close to it, rather than bullion, forecasting it to be the next big thing.

Mark Johnson, of USAA Precious Metals & Minerals Fund, said: We continue to emphasize low-cost producers with strong management and good balance sheets that have growth profiles and also relatively reasonable valuations.

His picks, especially junior miners with good values: Great Basin Gold,  Aurizon Mines,Allied Nevada Gold and Agnico Eagle Mines, though the latter's stock was hampered by third-quarter results.

Other stocks he favors include Gold FieldsFresnilloGoldcorpNewmont Mining andKinross Gold.

First Eagle Gold Fund's Rachel Benepe said his fund favors some South African mining companies, such as AngloGold AshantiHarmony Gold Mining and Gold Fields. Also, Barrick Gold is becoming more favorable as it keeps closing out its hedge book, she added.

Joe Foster, of Van Eck International Investors Gold Fund, seeks companies likely to keep increasing production. He likes IAMGold, which he described as a turnaround story with growth prospects due to new discoveries and acquisitions. He also likes Red Back Miningdue to discoveries in western Africa.

Drawbacks continue

However, having said all that, there are serious drawbacks with gold investment of any kind. Except for the past three years, the price of gold has been on the slide after a peak in 1980.

Central banks have tons of gold bullion which they still occasionally threaten to sell. When central banks sell gold it can force down prices.

And, some hedge fund managers are avoiding gold and are opting for other ways to protect against inflation.

I'm not a gold fan, Bill Ackman, head of hedge fund firm Pershing Square Capital Management, said during a speech last month at the Value Investing Congress in New York.

The metal is a greater fool type investment, he added.

You have to go to a lot of investment conferences to persuade other people to buy it, Ackman said. I'd much rather own something with a stream of money coming in.

I have never been a gold bug, Paul Tudor Jones, chairman of hedge-fund giant Tudor Investment Corp., wrote in an October 15 letter to investors.

It is just an asset that, like everything else in life, has its time and place.

The point is: Is it time?