Gold or Bitcoin: Which looks set to be the better investment for 2016?

You might say that comparisons between gold and bitcoin represent a clash of the old and the new, when it comes to investment opportunities.

Gold has long held a place in the minds of many investors who are looking to diversify their portfolio and provide a hedge against inflation and a safe haven in times of economic uncertainty. Bitcoin is a new technology and this digital currency is in comparison to gold, the new kid on the block.

The question that is worth asking is whether you should retain your faith in the staying power of the precious metal in turning you a profit, or whether you might be better served by concentrating on a digital currency to give you a decent return in 2016.

Mixed start for gold in 2016

Gold has traditionally been viewed as a safe alternative investment, when markets are jittery about challenging socio-economic conditions, and this was aptly demonstrated by the way gold prices behaved at the beginning of 2016.

Gold had managed to achieve a 20% rise this year in response to global economic malaise that truly looked liked a festive hangover and managed to wipe billions off stock values. No sooner had gold started to do what it normally does in challenging market conditions, when the gold price started to soften in response to a more dovish outlook from the Fed.

The US central bank was expected to introduce four rate hikes throughout 2016, but they subsequently lowered expectations to suggest that it was likely to be two rate hikes. The relevancy of this is that leaving rates on hold for longer would hit the dollar, against which gold is a hedge.

Shortly after had gold started to rise in response to central bank comments and news of the terrorist attacks helped generate further interest in the precious metal, the Fed suggested that an interest rate rise might be sooner than expected , which prompted a fall in the gold price.

March 2016 witnessed the first serious wavering of conviction amongst gold investors and a drop of 3% in a week, so what is the likely outlook for the rest of the year?

Profit-taking rather than a downward trend

There is some belief amongst gold traders that there are a lot of bets still running on gold prices rising further, and the recent falls are just a case of some investors taking profits.

The fact that gold has demonstrated decent resilience in being able to sustain a price above $1,200 in various circumstances and conditions, would seem to confirm that an upward trend in the gold price is set to continue through 2016.

Underlying economic concerns, combined with an accommodating monetary policy and better supply and demand conditions than there were in the last couple of years, could all conspire to give gold an upward price momentum.

If gold has managed to overcome its inhibitions and sheds its traditional negative correlation with the dollar, it could could carry on where it sits now after the first quarter of 2016, as the best performing asset class this year.

Gold as investment does tend to divide opinion and you will doubtless find plenty of opinions to suggest that it should not be part of your portfolio, but there are just as many voices who believe that the gold price rally might last the year.

If that is the case, how would an investment in bitcoin fare by comparison?

Bitcoin – The new shelter?

You didn’t have to look far for bad news and nervousness in 2015,  with the S&P barely managing to return 3%, oil virtually reaching the bottom of its own barrel with a 35% dive in prices and slowing growth in emerging markets, just some of the woes to weigh on investors minds.

As already alluded to, the traditional view has been to turn to gold as a safe haven option, but could bitcoin be a viable and more profitable alternative?

2105 was a good year for bitcoin, with a 44% rise recorded overall by the middle of December and in fact, the last six months of 2015, have witnessed an 80% rise in the price. That is a good year for any investment and those sort of numbers helped to put bitcoin on the radar of more investors. It also was a breakthrough year for the blockchain technology, with many major banks announcing that they were experimenting with the technology, although not bitcoin itself.

The problem so far with bitcoin, is that it has suffered from an image problem, but as government and law enforcement agencies start to accept that the digital currency actually poses a lower threat to spur dubious and criminal activity than first envisaged, the price has responded generously to the better reception.

It should pay not to forget that there is a definite sense of deja vu with bitcoin, as the price surged to $1,200 in 2013, only to fall back as doubts abouts its ability to stay the course surfaced. Bitcoin certainly has the innovative capabilities to become a mainstream investment option, and if the bitcoin versus blockchain debate is finally settled, the bitcoin price could definitely reach its previous levels and beyond.

To try and answer the question of whether gold or bitcoin would be a better investment. The answer probably lies in how you view the technology and whether you consider that public perception of bitcoin gains traction and remains positive.

If that turns out to be the case, then there is every chance that bitcoin could outstrip gold in 2016. The trouble is, do you want to pay to find out the answer to this question?

At least with gold, you are dealing with a traditional hedge that has an established place in the psyche of investors, so you have to decide what suits your own risk profile, when considering if bitcoin or gold could prove to be a better investment in 2016.

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Elizabeth Goldman is the editor of AlternativeInvestmentCoach.com. She has written for Investing.com, Bullbearings.com and many others.