The answer is neither; the Istari are perfectly capable of "uncloaking" and Gandalf does so (or threatens to do so) on a number of occasions in the books.
The Istari essay in Unfinished Tales sets out the scope of the "Rules" under which they operated:
their emissaries were forbidden to reveal themselves in forms of majesty, or to seek to rule the wills of Men and Elves by open display of power, but coming in shapes weak and humble were bidden to advise and persuade Men and Elves to good, and to seek to unite in love and understanding all those whom Sauron, should he come again, would endeavour to dominate and corrupt.
What's important to note here is that this is not a restriction on level or degree of power. There is precisely one limitation in which the Istari may not use power, and that is to "rule the wills of Men and Elves"; aside from that the Istari may use power to battle evil, accomplish magical feats, etc.
I used the word "uncloaked" above, and that was directly lifted from LotR, where Bilbo initially refuses to leave the Ring behind:
'It will be my turn to get angry soon. If you say that again, I shall. Then you will see Gandalf the Grey uncloaked.' He took a step towards the hobbit, and he seemed to grow tall and menacing; his shadow filled the little room.
Let's also look at Gandalf during his fight against the wolves before the Fellowship enter Moria:
In the wavering firelight Gandalf seemed suddenly to grow: he rose up, a great menacing shape like the monument of some ancient king of stone set upon a hill. Stooping like a cloud, he lifted a burning branch and strode to meet the wolves. They gave back before him. High in the air he tossed the blazing brand. It flared with a sudden white radiance like lightning; and his voice rolled like thunder.
And finally at Helm's Deep:
There suddenly upon a ridge appeared a rider, clad in white, shining in the rising sun ... The White Rider was upon them, and the terror of his coming filled the enemy with madness. The wild men fell on their faces before him.
The language used here is very important, so let's extract some key phrases from all 3:
- he seemed to grow tall and menacing; his shadow filled the little room
- he rose up, a great menacing shape ... stooping like a cloud
- the terror of his coming filled the enemy with madness
Remembering that this is Gandalf we're talking about, let's now compare with another passage, describing something else:
What it was could not be seen: it was like a great shadow, in the middle of which was a dark form, of man-shape maybe, yet greater; and a power and terror seemed to be in it and to go before it.
It came to the edge of the fire and the light faded as if a cloud had bent over it.
At this point the conclusion should be unmistakable: Gandalf has exactly the same intimidating presence as the Balrog, is quite prepared to use it where necessary, and is clearly not under any restrictions - even as Gandalf the Grey - that prevent him from doing so.
This was a fairly long-winded way of deconstructing the notion that the Istari must always act in a low-key, subtle or behind-the-scenes manner. The limitations imposed on them, and their various degrees of power, aren't something that can be measured on a scale with only one axis. They can't confront Sauron directly, they can't seek to dominate the wills of Elves and Men, but they can and do "uncloak" and unleash immense power where circumstances otherwise require it.