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Comment by kingkongrevenge | Hacker News Reader

His advice that the average person should not speculate in equities is sound, but he kind of ignores the fact that if you're 100% CDs you're a currency speculator. You're betting on the dollar and the US banking system. There is no true safe haven.

The more history I experience the more sense Harry Browne's old "Permanent Portfolio" makes. He said (if I recall correctly): A third equity indexes, a third bonds (weighted sovereign), a third gold, and make sure a third of the whole mix is not only internationally diversified but actually outside the control of your government. Rebalance once a year.

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In Fail-Safe Investing, Harry Browne's suggestion is 25% each in: equity index funds, long term bonds, cash (in a treasury money market fund,) and gold.

Also, he suggests everything be U.S. stuff. U.S. stocks, treasury bonds, and treasury-backed money market fund. Obviously this doesn't apply to gold.

He does also suggest that some of your assets be held outside the control of your government. His advice for how to accomplish this is to have most of your gold held in a bank in Switzerland or Austria.

Always surprised to see gold on this list. Isn't it the ultimate baseball card? Held mostly for trading and influenced by both unpredictable demand (fashion) and unpredictable supply (what if some huge mine is discovered?).

You find gold more surprising than cash against these concerns?

There are two differences. One, gold is impossible to counterfeit. The Fed can print more money, companies can dilute their stocks, Topps can introduce new lines of baseball cards, but short of building a particle collider, you can't make more gold. The chance of a new discovery affecting the price of gold is rather slim. The Earth is pretty well explored at this point. The second difference is that gold is a natural Schelling Point (http://en.wikipedia.org/wiki/Schelling_point). Society needs one object to serve as a store of value. We call this object money. Throughout the ages, this object has consistently been gold. Currently, we are in a historically abnormal period where the store of value is a U.S. Federal Federal Reserve Note. If it looks like the U.S. government is abusing this privilege by diluting the currency, people start hedging back towards gold. On the other hand, if someone like Paul Volcker starts running the show, faith in the dollar is restored, and the price of gold collapses.

So yeah, gold is like the ultimate baseball card. But the emphasis is on the world "ultimate", and that makes all the difference.

2 reasonably big assumptions: 1 stable supply (no new gold) 2 stable as a Schelling Point. Not unreasonable. But it's not unreasonable to assume the dollar will maintain value either.

Society needs one object to serve as a store of value

Unfortunately, it does not have one. Gold is one such object. You yourself are describing a fluctuation in demand in response to US government actions. That will lead to a fluctuation in price regardless of the real world value it supposedly represents - just like any other currensy. With the bonus that you can make earings out of it.

Exactly, gold fluctuates like any other currency. The disadvantage with gold is that you can't earn interest or dividends in it. The advantage of gold is that it is run by the most responsible monetary authority in the world, a central bank that couldn't print more of it if it wanted too. Pros and cons, to both, that's why the suggestion is to keep about 25% of one's portfolio in gold. It's a hedge against a gross mismanagement by the U.S. government.

Not only that, but if you only invest in CDs, your real rate of return (interest - inflation) isn't going to be impressive and may actually be negative since the government tends to soft peddle the actual inflation numbers.

How about substitution of real estate for gold? Real estate might not be en vogue right now - but at least you can grow food on a farm.

Owning real estate is more like taking on a part time job than a passive investment.

Which is why it's attractive to middle income investors.

Apart from the fact that they can make big bold moves like leverage 10/1, control an asset worth 5X their yearly income, etc.

But a bigger reason is that it gives them a way of relatively easily combining time & money investments without giving up their normal income.

One problem with real estate is that it's not very liquid. And it's hard to get ample diversification unless you're super rich.

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