Gold is a mildly efficient long-term inflation hedge; an ounce of gold bought a good men’s suit in London in 1800, then again in 1900, and in New York now. To consider making gold a significant part of a portfolio is to state that one expects, for all intents and purposes, hyperinflation. To liquidate quality equities in order to take a substantial position in gold at this juncture (gold near $1000, S&P 500 under 800) seems to me daylight madness. It’s panic, disguised as a portfolio "strategy."

A look at the last (and indeed America’s only) episode when the mob institutionalized a terror of hyperinflation is instructive. In 1980, the London gold fixing topped out around $860, with the spot price hitting a blowoff intraday high a little over $900.The best level of the S&P that year was around 140. (The 1980–82 period being the last time equities were as screamingly undervalued as they are now.)

In other words, the nominal price of gold at $1000 is a bit less than 20% higher than it was in 1980, 29 years ago. (I’m guessing the inflation-adjusted price of an ounce of gold is around $400). The S&P at 750 is five times higher than it was then—ignoring dividends—and as recently as 2007, it was ten times higher.

My guess is that something like this is what’s going to happen to the new gold bugs, especially those who finance their purchases of gold with the proceeds of the sale of equities. I can think of few strategies less likely to work out.

These and the whole panoply of "road to socialism" objections are rationalizations for panic: if the whole country’s going to hell, I’m justified in getting out. Don’t bother trying to answer them. Everything people are saying (not at all unreasonably) about the statist/collectivist/interventionist turn of our politics is exactly what people said (not at all unreasonably) about FDR in the 1930s (when the Dow was 100 or less), and about Jimmy Carter in the 1970s (when the Dow was 1000 or less). What are people going to do: buy bonds? Brush these things aside; don’t engage with them. Above all, don’t assume the burden of proof.

I’d tell them to go to 4%–4.5% of the current (or even better, trough) value of the account through the end of 2009, adjust their budget accordingly, and get some part-time work if it’s necessary. Once this decision is faced, a lot of pressure will be off them (and you), and you can plan to look again at the end of next year.