Gold vs. Bitcoin: Which Will Outperform?

Gold prices experienced a pretty rough 2013, with the yellow metal plunging more than 25% on the year. This marked the first time in more than a decade that gold produced a calendar year loss, and it has led some to think that the glory days of the precious metal are over.

The New Kid
Yet, while gold struggled, a newcomer to the ‘safe haven’ market stole the show in 2013, bitcoins. This new type of currency—which is ‘mined’ by supercomputers—has attracted a huge following.

The currency is out-of-reach from inflating-prone central banks, and since there are only a finite number of bitcoins available, worries over devaluations are non-existent. Thanks to these features, bitcoins became extremely popular last year, while the performance of bitcoins didn’t hurt its popularity either.

After all, bitcoins started the year trading around $14 for each bitcoin, and soon spiked to over $238 by the start of the second quarter. And following a big drop in April and May, bitcoins took off, finishing the year around the $800 mark, representing a huge gain for investors.

2014 Outlook
So far in 2014, gold, as represented by ETFs like GLD and (IAU), has been pretty much flat. Meanwhile, gold miners, represented by GDX, have faced some turbulence too, losing about 2% to start the year.

Bitcoins on the other hand, have already added more than 10% in the year, soaring past the $1,000 level before falling back a bit lately. So already this year bitcoins are off to a good start once again.

And with some concerns over production amounts for gold, we might see further losses in the precious-metal market, especially if the economy continues to chug along and investors remain in stock investments instead.

Due For A Bounce
However, after such a horrendous year in 2013, I think the metal is due for a bit of a bounce back, especially if gold bugs look to get in a better price for the long haul, or for miners that can hold on in this difficult time. Barrick Gold (ABX) is actually at a 9.5 forward PE, while the gold mining industry, although still depressed, has moved out of the bottom bracket from a Zacks Industry Rank perspective, suggesting it is may be due for a rebound soon.

Meanwhile, after bitcoin’s incredible run and huge amount of press last year, it is bound to attract some attention from governments around the world. Legal issues seem likely to creep up this year, and that could drag down bitcoin’s value, or at least increase volatility.

The China Factor
We have already seen a preview of this thanks to a crackdown in what is thought to be a key market for bitcoins, China. In fact, just this week, China’s biggest e-commerce company, Alibaba, banned the sale of bitcoins on its Taobao marketplace.

If others follow suit or if more legal worries hit bitcoins in key markets, it might prompt some to cash in their huge winnings, and stay on the sidelines for the near term.

Given this, I think that the much-hyped crypto-currency takes a step back this year, and that gold finds a way to rebound. But what about you?

Are you betting on gold or bitcoins in 2014?

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