Gandalf is more powerful. When he was Gandalf the Grey he was the third in command within the Istari Wizard order. The second in command was Saruman the White. The first in command was origianlly Sauron the Black. Also the Istari Wizards belonged to the Ainur (beings created by the Illuvatar - who is the creator of the universe and Arda).
Among the mightiest of the Ainur was Melkor. He was also the first born of all Ainur. He did not belong to the weaker Istari Wizard order (Istari Wizards belonged to the Ainur order known as Maiar). The head division of the Ainur is Valar, which means "The Powers". Although Melkor was considered the most powerful of Ainurs, he was not the leader of the Valar nor did he belong to it. The leader of the Valar was Manwe Sulimo (the brother of Melkor).
Melkor and the rest of the original Ainur (Valars) were assigned during the age known as The Springs of Arda, by the Illuvatar to guide the beginnings of Arda and all its continents, places, and such, like Valinor (which was to be the dwellings of the Valars before the coming of the First Age). However, three ages ( 9, 000 years ) before the First Age began, Melkor began to sought power for himself and eventually changed his name to Morgoth.
He also began to despise the rest of the Valar and wanted to destroy them. With his increasing hatred towards the rest of the Ainur, he accomplished the destruction of the Lamps of Valar (Magical Lamps that gave light and illumination to the world of Arda). By doing so in the process, Melkor (Morgoth) also destroyed Almaren - the original dwellings of the Valar, before the First Age. The rest of the Valar (not including Melkor) decided to move to a new land within Arda. This land was to be known as Valinor.
Melkor continued his onslaught against the Valar, but the Valar fought back and eventually defeated Melkor. They even imprisoned him for three ages as a part of his punishment and reformation process. After his imprisonment term was over, Melkor was once again free to roam the lands of Arda. The First Age was not yet here, but the birth of the Elves came to be.
Melkor was angered by the arrival of the Elves and sought to destroy them as well. He began his campaign against the Elves by invading the elven fortress known as Formeno. During his seige of Formeno, Melkor had slain Finwe, who was High King of the Noldor (a division within first Elves - also known as the Elves of Cuivienen).
Under Finwë's rule the Noldor dwelt for at least three ages (about 9,000 years) in Valinor, and learned much from the Valar, especially Aulë the Smith. During this time, he dwelt in a place called Tirion, but afterwards his eldest son Fëanor (the half-brother of Fingolfin) withdrew to his fortress of Formenos, and Finwë went to dwell there also. In addition, during the seige of Formenos, Melkor managed to steal the Jewels of Feanor (the Silmarils).
Melkor also destroyed the Trees of Valinor and then soon, fled to Northern Middle Earth where he had built a mighty fortress of his own known as Angband (Angband was built during The Year of the Trees). Finwe's son Feanor (now king of the first Elves) soon discovered that the Silmarils had been stolen by Melkor. As an act of revenge and wanting to recover the Great Jewels, he made an oath (known as the Oath of Feanor) assembled a mighty army of Noldor Elves (with his seven sons) and marched them onwards into the lands of Middle Earth (where Angband was heavily fortified in). This war became known as the War of the Jewels.
During the Battle for Angband, Fëanor found his army heavily outnumbered greatly by Morgoth's Orcs and Balrogs. He was slain at last by Gothmog, the Lord of Balrogs, and such was the ferocity of his spirit that after his death, his body was consumed by flame. Note: Gothmog was also the Balrog in the Fellowship of the Rings (many ages after, of whom Gandalf the Grey ultimately defeated in the pits of Moria - lasting for approximately 3 months).
The rule of Melkor (Morgoth) upon the lands of Middle Earth had lasted for such a long time and this reign was known as the Age of Great Darkness. He had held his fortress (Angband) for many many centuries and had even defeated the great elven warrior Fingolfin with his personal hand weapon known as the Hammer of the Underworld (also known as Grond or the Grond Hammer - which during many ages later, was used as a giant battering ram in the attempted seige of Minas Tirith in the Return of the King).
Morgoth met his end in the War of the Wrath (during the First Age). It was during this time that the forces of the Valar, with the peoples of the Vanyar and the Noldor saild eastward in the ships of the Teleri. In this great battle that followed, Morgoth's armies were almost completely destroyed, and only a few of his Balrogs, Dragons and Orcs survived.
Morgoth himself was taken as prisoner and shut beyond the confines of the World, and the Silmarils were recovered from his Iron Crown. In the tumult of the war, Beleriand and the lands to the north were destroyed and sunk beneath the sea, and the shape of Middle-earth was changed.
Enter Sauron. After the War of Wrath and the expulsion of the first Dark Lord, Sauron (then the apprentice of Morgoth) rose to become the greatest enemy of Elves and Men in the Second and Third Ages. Following the defeat of his master, Morgoth, Sauron fled for a time into the east of the world. A period of one thousand years followed in which Sauron was not seen in the west of Middle-earth.
As the first millennium of the Second Age turned, Sauron came back. He took the fenced and mountainous land of Mordor, and there began building his mighty Dark Tower of Barad-dur. The beginning of Sauron's reign as Dark Lord can be dated from this time: he set himself no less a goal than the conquest of Middle-earth, and perhaps even of Numenor itself.
For six hundred years, he pursued a dual strategy. In the guise of Annatar, the Lord of Gifts, he tutored the Elves of Eregion, teaching them the secret things that only a Maia of Aules people could know. From his lore, the Rings of Power were forged, but while he worked with the Elves, he continued the fortification of Mordor to make it an unassailable stronghold.
In the fire-mountain of Orodruin, he secretly forged the One Ring. This was to be the first stroke in his conquest of the west - a device by which he could know, and control, the thoughts of the bearers of the other Rings. His plan failed, though: the Elves became aware of his malevolent presence, and took off their Rings.
Angered by this setback, Sauron loosed the hordes of Mordor, six hundred years in the building, and overran Eriador, destroying the land of Eregion where the Rings were made. The Elves called on Númenor for aid, though, and the army of Tar-Minastir put Sauron's forces to rout.
After this reverse, Sauron sought instead to build power in the eastern countries, and left the Westlands in peace for many centuries. When Ar-Pharazon usurped the throne of Númenor in 3255 (Second Age), he saw Sauron's growing eastern kingdom as a threat. Building and equipping a mighty fleet, he sailed for Middle-earth, and landed at Umbar, to the south of the Mouths of Anduin. Ar-Pharazon demanded that Sauron submit to his authority and, seeing that the might of the Numenoreans far outstripped his own, Sauron agreed.
Enter Gandalf. In origin a Maia of Manwë and Varda, Gandalf came to the northwest of Middle-earth after a thousand years of the Third Age had passed, with four others of his order. At the Grey Havens, Círdan entrusted him with the Red Ring, Narya, to aid him in contesting the will of Sauron. Gandalf wandered widely in Middle-earth, and learned much of its races and peoples.
Unlike his fellow Wizards Saruman and Radagast, he never settled in a single place. He was instrumental in the victory of the War of the Ring, but during that conflict he battled with a Balrog (it was Gothmog who had lasted for many milleniums after his escape from the War of Wrath), and though he was ultimately victorious, his spirit left his body, but was sent back to Middle-earth to complete his task. It was during this time that became Gandalf the White (First in command of the Istari), to replace the corrupted Saruman.
A brief overview of the Istari's time on Middle Earth can be described as them arriving in Middle-earth after the end of the first millennium of the Third Age. They were sent by the Valar to aid Elves and Men, but none knew this but Círdan the Shipwright, Lord of the Grey Havens where their ships put in. Though Saruman was at that time the acknowledged leader of the Wizards, Círdan saw that Gandalf was in fact the greater, and secretly gave him the Red Ring Narya to aid him in his quest.
For almost 1,500 years, Gandalf wandered the northern and western regions of Middle-earth, learning of its lands and cultures. He was closest in friendship with the Elves, and especially Elrond, who had learned of his origins from Círdan. As a Maia, he had many natural abilities that would seem magical to mortal races, but he also had a great store of knowledge of more 'mechanical' magic, worked through spells and incantations, and especially through the agency of his staff.
It is clear that he had far greater power, especially after his return as Gandalf the White, than he ever displayed in Middle-earth. His magical powers seem to be particularly associated with fire, a fact that is perhaps related to the Ring of Fire, Narya, that he bore.
