Inflation specter has some investors pining for gold

By John Parry and Pedro da Costa - Analysis

NEW YORK (Reuters) - Unease over a surge in U.S. government borrowing has some analysts nervous that, even as the immediate threat of deflation looms, hyperinflation on a global scale may be the eventual result.

A recent spike in both gold prices and the cost of insuring sovereign debt against default shows that investors worry an eventual meltdown of major currencies cannot be ruled out.

Economists emphasize that the prospect of a Weimar Republic-like crisis of confidence in money itself is not the most likely endgame to the global credit crisis.

They also note that, given the predominant risk of deflation, policy-makers have little choice but to flood the financial system with money, if only to counter the most rapid retrenchment in U.S. consumer spending in half a century.

Yet those investors who are less prone to taking big risks note that gold is the most obvious hiding place from the nightmarish scenario of vanishing trust in fiat money, or paper currency not based on a hard asset.

Indeed, its latest jump was triggered in part by massive government debt issuance, which some say threatens to undermine the value of the paper it is printed on.

"That sovereigns don't default because they can print money is technically true, but the big question is whether the money is worth anything," said Jay Mueller, senior portfolio manager with Wells Capital Management in Milwaukee, Wisconsin.

"In the movement of gold you are seeing the fear that the dollars that you could pay back in aren't worth as much," he said.