Which is a better investment, under different scenarios?  WSJ analyzes:

Is the outlook for the world economy dark enough for gold to continue to glitter?

Remarkably, the gold price has appreciated 12% since April, a period during which financial-meltdown fears appear to have receded and investors have rushed back into riskier assets. Gold's resilience suggests continuing demand for an asset that could outperform in worst-case scenarios.

But not every difficult economic outcome is the same. That is something investors need to remember as they decide whether gold — rather than Treasurys — really is the best disaster hedge.

Treasurys start with several advantages. They produce an income stream, whereas gold doesn't. And, although Treasurys would be hit if there is a strong economic rebound with low inflation, gold would likely be hammered.

 

Next, Treasurys actually did better than gold in the fear-drenched period at the end of last year. The Merrill Lynch price index for the 10-year Treasury jumped 11.6% from September through the end of 2008. The Comex gold price was up 6.6% over the same period, and it sold off sharply in the middle of the meltdown. That last fact suggests gold benefits when markets are functioning — like now — but the metal, like other assets, can fall when markets close down.

In other words, Treasurys could trump gold in a Japan-like environment, where deflation pushes up real yields but isn't high enough to cause serious stress on the financial system and the wider economy.

But gold has a big friend in Western central banks, especially the Federal Reserve, which is still printing enormous amounts of dollars to support key markets. This makes the inflation outlook uncertain, helping gold and hurting currencies like the dollar.

The printing looks set to continue. Ominously, this weekend, the G-20 said central-bank liquidity support "will need to remain in place for some time."

One area where that support could stay in place for a long time is for the U.S. housing market. Right now, there is almost no private-sector demand for nonconforming residential mortgages, reflected in the fact that the U.S. government has effectively or explicitly guaranteed as much as 85% of all mortgages originated this year, according to Inside Mortgage Finance. In turn, the Fed is buying nearly 80% of government-backed mortgages packaged in securities. If it pulls back, house prices could resume their slide, triggering more foreclosures and losses for banks.

Finally, soaring fiscal deficits favor gold. The IMF expects G-7 countries to show a combined fiscal deficit equivalent to 10.36% of GDP this year, more than double the level following the 1990-91 recession. True, it is impossible to time a fiscal Armageddon bet. The yen has stayed strong even as Japanese government borrowing has exploded over the past 20 years.

But government finances are now deteriorating in most developed countries.

For pessimists, if we're in for a Japanese-style deflationary bust, buy Treasurys. For other disaster scenarios, go for gold.