Suppose that the majority of the stake holders of The DAO decide having a 100% ETH stake is risky due to its volatility. Would it be possible to propose converting, say, 50% of The DAO's stake to Digix GOLD, in order for the company to have a more stable reserve? And, obviously, move it back to ETH on demand?
Yes, once a decentralized exchange like EtherEx is deployed.
The DAO essentially works by allowing proposals to send transactions to other addresses/contracts, and these transactions can contain data which allows them to call functions of other contracts.
This means that the contract could execute a proposal to create a buy order on EtherEx for DGX tokens, and the DAO would then be able to store and spend the tokens through calls to the DGX token contract, via proposals. Similarly, it could issue a sell order.
So, yes it's technically possible, although practically I doubt a proposal o convert half of THE DAO's Ether to gold would gain much traction.