Should the U.S. sell off its gold reserves to pay down debt? That's the latest idea being tossed around by gold bug Ron Paul. Not only would selling Old Yeller help the U.S. pay its bills, says libertarian Paul, but it would put more gold in the hands of the American people and pull back the reins on the Federal Reserve, which is printing money like mad and debasing the value of our currency. So insistent is Paul about this strategy that he challenged the government to a gold audit to make sure its stash of bullion at Fort Knox is really all there. (According to the Treasury's inspector general, it is.) So is selling it a good strategy, or is Paul just a crazy kook?

When it comes to the concept of gold, it can be hard to tell. With the price of gold up 24% in the past year, the gold bulls are everywhere. And our country has a long history of obsessing over gold, which Thomas Frank describes quite well in the latest issue of Harper's Magazine: I do not mean to scoff at gold bugs - or not much, anyway. Money cranks are part of a long tradition in American life, and just as there was an attractive democratic subtext to the free-silver agitation of the 1890s, so there is an attractive moral idea behind the hard-money mania of the present day. It's the old story of hubris, of man getting above himself and crashing inevitably back to earth. Even if the central bankers' intentions are good, reasons the metalhead, they are still bound to screw things up ... (See pictures of modern day gold prospectors.)

These mandarins fiddle with mortgage incentives, they try to adjust the knobs and get the interest rate exactly right, they use the tax code to encourage this and discourage that, and when all else fails they rescue the big banks with drafts on the public treasury of a size that would be considered insane in any situation other than a world war. Sooner or later, the gold bug feels, this technocrat-made system will come crashing down.

For folks who generally believe in having a central government, it may be easy to write off hard-money cranks like Paul and Utah Governor Gary Herbert, who last month signed a state law that renders gold and silver coins minted by the U.S. government legal tender. But what about all the wise and successful investors who have also been stashing gold in this economy? For instance, John Paulson, George Soros, Goldman Sachs, and Citigroup, to name a few. Are they just hard-money kooks too? (See the top 10 bankruptcies.)

Not likely. The fact is, there are valid reasons to hold some gold in this economy. The Wall Street Journal's Dave Kansas describes a few:

Greece (and Portugal and Ireland and..). Athens runs out of cash in about a month. Out. Of. Cash. Eurocrats are scrambling to give Greece another band-aid, via more loans and a "voluntary" rescheduling of Greece's debt. Many are warning that a Greek default could lead to nasty repercussions for the common currency. Given that the euro-zone represents a giant chunk of the global economy (Germany, France, Italy), the frailty of the common currency makes sturdy gold attractive.

Inflation. We don't see much in the U.S., but it is creeping higher around the world (China, India, the euro-zone, the UK are all grappling with higher inflation). Plenty of level-headed people think the deeply indebted developed world will need inflation to make those debts less burdensome. With monetary policy extremely loose around the world, it could happen. In such a scenario, gold is a solid store of value.

Deflation. Okay, sort of having it both ways on the inflation/deflation front, but some gold backers still fear deflationary problems, similar to what Japan has dealt with for the past two decades following its asset-bubble collapse. Deflation is considered worse than inflation.

Middle East unrest. War (Libya), Civil Unrest (Syria, Yemen, Bahrain) and still unpredictable revolutions (Egypt, Tunisia) could spill into something nastier, putting the globe's oil markets on edge. Again, gold can make sense if chunks of the world look very unpredictable. That raises the question: Even if you believe in selling off gold to pay down government debt, is it really the right time for the U.S. to sell? Ron Utt, an analyst at the Heritage Foundation, thinks the U.S. should strike while gold prices are high. He recently said: "Given the high price it is now, and the tremendous debt problem we now have, by all means, sell at the peak." But if, like Paul, you believe paper currency is doomed, then the price of gold is surely still headed up. And in this market, selling off the government's gold wouldn't get you very far. The Treasury's roughly 262 million ounces of bullion is worth about $390 billion. That's only a fraction of our $1.5 trillion deficit and an even smaller slice of our $14 trillion in federal debt. (See 25 people to blame for the financial crisis.)

And there are plenty of other reasons for the U.S. not to sell its gold. As with any investor, a dose of gold in the U.S.'s portfolio serves as a worst-case inflation hedge. Plus, the price of gold is historically very volatile - up 10% one month, down 10% the next - which is why governments don't go buying and selling it off on a whim. If the world's most successful investors think holding onto their gold is a good idea in this economy, the U.S. government should probably do the same.

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