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Bernanke doesn’t understand gold, should we?

Junko Kimura | Bloomberg | Getty Images

The recent volatility in gold prices has left not only investors and traders puzzled about what is going on with the precious metal.

"Nobody really understands gold prices and I don't pretend to understand them either," Federal Reserve chief Ben Bernanke told the Senate Banking Committee on Thursday in response to a question on why gold prices have been volatile.

As traders speculate whether battered gold prices can make a decisive push above the key $1,300 level or are headed for more pain, analysts say there's another key factor for the gold outlook that is being overlooked: strong demand for gold from Asia.

(Read More: What Bernanke's testimony means for gold: Pro)

Former U.S. Mint Director Edmund Moy says the recent volatility in gold prices has distracted U.S. investors from noticing the strong demand for physical gold, particularly from Asian investors.

"Lower gold prices have spurred even stronger demand by Asian investors. That has resulted in a huge transfer of physical gold from the U.S. to Asian economies, especially China," said Moy, who is currently the chief strategist at Morgan Gold, which sells gold coins as investments.

Gold has rebounded almost 9 percent from a near three-year low hit in late June on easing worries about an unwinding of U.S. monetary stimulus. But after a fall of more than 20 percent this year, sentiment remains weak and analysts are not convinced the metal is a good long-term buy.

(Read More: Gold nears $1,300, but analysts say it's not a 'buy')

According to Moy, while electronic derivatives of gold such as exchange traded funds (ETFs), futures contracts are popular with Western investors, these proxies have not yet become a substitute for physical gold in Asia.

"If mediocre economic growth in the United States continues, expect the Fed to have great difficulty unwinding QE [quantitative easing] without inflation, which will cause U.S. investors to seek physical gold again but with far less supply available," said Moy.

A shortage is expected to result from less supply coming on the market from gold miners due to prices being at or near production costs, he said, in addition to the current transfer of physical gold from the U.S. to Asia.

"Asian investors tend to hold on to physical gold and are generally reluctant to leverage or loan their gold out or sell when gold prices go up," Moy said.

Asia's gold affair

Andrew Su, CEO of Compass Global Markets, agrees that support for gold stemming from demand in Asia should not be underestimated.

"When gold hit $1,180 within the last couple of weeks, a lot people came in to support the price purely because that's where production costs for gold are. I was in Hong Kong and Singapore recently, physical gold is drying up." Su told CNBC Asia's "Squawk Box" on Friday.

(Read More: A 'tug of war' that puts a floor under gold)

"We are seeing some consolidation (and) a reduction in volatility so I'm quite bullish about gold prices from these levels. We're building long positions," he said.

Gold prices were traded at $1, 286 per ounce on Friday. The yellow metal has been beaten down this year, as a benign global inflationary environment dented its appeal as a hedge against rising prices. Prospects for a scaling back of liquidity in the world's largest economy, which has led to the rise of the U.S. dollar, have also taken a toll.

(Read More: Why gold bugs may wish for a China hard landing)

Kelly Teoh, market strategist at IG Markets, expects the precious metal to trade in the range of $1,200-$1,300, noting that a breakout from these levels would provide a clearer signal of the longer-term direction.