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Surprised there hasn’t been more specialised niche/alternative funds really after all the drama. “Invest in cocoa plantations”, that sort of business. Would all end in tears of course!

Nice phrase I think Harry Browne thought along those lines – it isn’t just an inflation hedge because he insisted on sticking with gold even after index-linked Treasuries and gilts were created. Gold is also a way of reducing governmental risk – half of the portfolio relies on the government not defaulting as it is (assuming that the cash part is meant to be T-bills, which I think was his intention).

If I was in Sweden I might say that a good alternative commodity to gold would be forested land – Swedish has an expression saying that if someone has “gold and green forests” they are well-off Timber has a more self-evident value than gold, and the combination of land and timber has significant value. Of course, it would be correlated to some extent with demand for timber and thus the economy as a whole. As your table shows, commodity prices have become quite highly correlated with stockmarkets.

The other disadvantage is that it is far easier to invest in a gold ETF than to buy a forest….

Investing overseas can definitely offer diversification via currency benefits (or the opportunity to make a call/trade). It would have helped a lot of UK only investors in the past 18 months or so:
http://monevator.com/2009/02/02/investing-overseas-can-diversify-portfolio/

Whether it’s true diversification or more risk/volatility is a matter for your professor I’m afraid!

Re: The Permanent Portfolio, I suspect it’s one of those things that works more if you do what it says on the tin rather than tinkering it a way. The gold holding is clearly an aberration on the surface, but perhaps it moves like the almighty in mysterious ways (e.g. providing relief at times when faith in the authorities is shaken).

I suspect any weird lumpy relic asset holding of 25% might do a similar thing – e.g. antique furniture, rare stamps etc. Gold does have the benefit of being more practical/portable/talismanic. Or possibly as you conclude one might hold commodities securities of some sort. You’d have to expect very different results though!

I agree with Lemondy that the Permanent Portfolio looks very interesting (and is still largely uncorrelated). But I too would be uncomfortable holding so much gold. After all, gold is only valuable because it’s shiny – it doesn’t provide an income stream, and there is no prima facie reason why it should be a store of value. Since their inception I believe index-link gilts have performed rather better (the stats are in an old Buttonwood blog post on the Economist website, I may have linked to them in an earlier comment here). On the other hand, the index can always be fiddled by the government, as Argentinians have discovered to their cost.

Perhaps what we need are rye bonds and coal debentures like those issued in Germany during the hyperinflation? Indexed to the price of a specific good (so not possible to fiddle the basket) but at least one that is obviously economically useful.

If I’m honest I’ll say I don’t know whether either gilts, or the FTSE, are cheap or expensive – and that I shouldn’t try to time the market. But doing exactly that is still key to my asset allocation decisions.

I’ve been reading through the quarterly reports of the Personal Assets Trust (excellent reading) and they have an interesting portfolio at the moment: 35% US TIPS, 8% gold, the rest in equities. http://www.patplc.co.uk.