Gyroscopic Investing

Let me see if I get this right... If we were on the gold standard there would not be inflation. As such there would not be a need for gold part of PP and there would be no inflationary danger for long term bonds. So, in a gold currency world one would keep some money for emergency expenses, get longest bonds for safety during downturns, and invest the rest in stock. So, some kind of the boglehead portfolio consisting of

6-12 months of living expenses in cash (gold)
long term treasury bonds (equivalent to maybe age)
the rest in stocks

would be perfect, right?

Before we broke the gold standard, there was slight deflation since the founding of the country. So yes, there was no inflation on the gold standard except for some extreme periods like wars (Civil War period, etc.).

If we were on a gold standard I think the portfolio would be more like a 1/3rd split of gold, bonds, and stocks or close to it. Talmud investing style I suppose. 

Interestingly, if gold and cash are equivalent and interchangeable, then
1/3 gold
1/3 LT bonds
1/3 stocks

is equivalent to
1/3 cash
1/3 LT bonds
1/3 stocks

which is roughly equivalent to
2/3 intermediate bonds
1/3 stocks

which is the standard, mainstream, conservative asset allocation.  So the PP is what you get when you start with a plain-vanilla conservative portfolio, then bulletproof it to deal with the problems that arise when our fiat currency doesn't work as advertised.  That's pretty much exactly how Browne described it, so I suppose this should come as no surprise.

D wrote: Let me see if I get this right... If we were on the gold standard there would not be inflation. As such there would not be a need for gold part of PP and there would be no inflationary danger for long term bonds. So, in a gold currency world one would keep some money for emergency expenses, get longest bonds for safety during downturns, and invest the rest in stock. So, some kind of the boglehead portfolio consisting of

6-12 months of living expenses in cash (gold)
long term treasury bonds (equivalent to maybe age)
the rest in stocks

would be perfect, right?

There actually have been fairly significant bouts of inflation even on a gold standard--mostly from wars as Craig mentioned.  A gold standard tends to inhibit inflation, but doesn't negate poor decision making by bureaucrats.  After Bretton Woods, the U.S. had over 20,000 tons of gold.  During the 60s, overseas creditors began to redeem dollars for gold because inflation caused the $35 fixed price to be too low.  By the early 70s, the U.S. had less than 10,000 tons left.  The redemptions (mostly by the French) caused Nixon to close the gold window. 

If the U.S. went back to a gold standard, I think you could make the case for either 1/3 stocks, 1/3 bonds, 1/3 cash or 1/2 cash, 1/4 bonds, 1/4 stocks.