MW This storied hedge fund says gold's true value is how useless it is to other markets

By Steve Goldstein

Gold should make up to 9% of a portfolio precisely because it doesn't zig as stocks and bonds zag

Gold, which reached a record high, could equally become worthless. How one hedge fund goes about assessing its value.

Labor Day has come and gone, white pants are officially relegated, and it looks like financial turmoil could make September ugly as gold reached a record while bond yields in the U.S., the U.K. and France, all with various political problems, marched higher.

A note published just before the break, from storied hedge fund DE Shaw, examined the role of just how much gold should be in an investor's portfolio. The piece used the unwieldy acronym NPSOV for non-productive store of value, which of course could also be applied to bitcoin, not to mention diamonds, fine wine or famous paintings.

"As an NPSOV, gold presents unique modeling challenges. It doesn't generate income or have widespread industrial uses, its return drivers are variable, and its long-term upside potential is unclear. What's more, like all NPSOVs, gold faces the ever-present possibility of becoming worthless should society collectively decide to stop ascribing it value," the $55 billion firm pointed out.

So where does the valuation challenge start? How about with the interesting notion that gold's value should equal the global wealth growth. Since 1975, when data became more reliably available, gold has generally represented between 1.8% and 7.3% of total developed market liquid wealth, though it's broken out of that range before, including right now.

So then the question becomes what will be the growth rate of wealth? GDP is a good starting point, but actually there are times when wealth grows faster than the economy, and over the last 50 years it's grown 2.4 percentage points faster. So if that trend were to continue, that would suggest wealth is growing roughly 5% per year (if you assume the global economy will increase 3% each year).

But there's also the growth in gold supply to consider. "Over our period, gold's supply has grown by approximately 1.6% per year, although some of this might already be incorporated into its price. On the other hand, some of this increase in supply would be counteracted if central banks were to continue to build their stockpiles during periods of geopolitical tension," says the hedge fund.

So you can imagine a few different assumptions as to how gold's value should be growing. DE Shaw settles on a return assumption of 0.5% per year above the inflation-adjusted risk-free rate, and assumes volatility of around 15%, which is in line with historical averages.

That doesn't sound like much. But here the hedge fund makes another point - gold's value depends on its correlation to stocks and bonds. There are times when gold correlates quite closely to stocks and, especially, inflation-linked bonds. But over long periods of time, gold's correlation - to stocks, bonds, inflation - is quite loose.

"These (low) correlations matter. Gold's lack of significant exposure to equity risk offers potential utility to a portfolio otherwise dominated by stocks and bonds. This may be true even though, as suggested earlier, gold's expected risk-adjusted return does not compare favorably with those traditional assets," the firm says.

One final correlation point - gold's role in a portfolio also is dependent on how stocks and bonds are correlated with each other. "Thus, other things being equal, in a positive stock-bond correlation environment, the potential portfolio utility of gold increases, even if our forecast for gold remains unchanged," the firm says.

There are still more considerations, but we'll skip to the end. We'll assume the investor will want gold in part for its protection to market crashes (the usefulness of gold decreases substantially if not). If the stock and bond correlation is negative, then DE Shaw arrives at a 6.5% optimal allocation, and if the stock and bond correlation is positive, then DE Shaw arrives at a 9% optimal allocation. Annoyingly, stock and bond correlation right now, taken over 12 months, is just about nothing.

The markets

Fascinating early hours moves: stock-market futures (ES00) (NQ00) are slumping, bond yields BX:TMUBMUSD10Y are rising, gold (GC00) and bitcoin (BTCUSD) are rallying and the dollar DXY is gaining.

   Key asset performance                                                Last       5d      1m      YTD     1y 
   S&P 500                                                              6460.26    0.33%   2.06%   9.84%   14.37% 
   Nasdaq Composite                                                     21,455.55  -0.19%  3.90%   11.11%  21.12% 
   10-year Treasury                                                     4.288      1.20    9.10    -28.80  38.00 
   Gold                                                                 3554.1     4.20%   3.66%   34.66%  40.15% 
   Oil                                                                  65.94      1.85%   -0.45%  -8.25%  -10.47% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

An appeal's court ruled that President Donald Trump's country-level tariffs are illegal, but that they'll be allowed to stay in place pending a higher court determination.

The Institute for Supply Management's manufacturing index is the key economic release, ahead of Friday's nonfarm payrolls report.

Kraft Heinz $(KHC)$ said it will split itself into two companies.

Chinese EV maker Nio $(NIO)$ reported revenue below Wall Street estimates.

Nestle ousted its chief executive over a relationship with a subordinate.

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The chart

It's weird adjusting to how bullish Morgan Stanley chief stock-market strategist Mike Wilson now is. He points out how the stock market is now closely correlated to the performance of 10-year breakevens. "Equities are not only an inflation hedge, but also tend to act well in Fed cutting backdrops," he writes. "This is likely why the correlation between equity returns and inflation breakevens has risen dramatically in recent months. While this policy environment is unique in many ways, a strong, positive correlation between equities and breakevens is very typical of an early cycle set-up," he says.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   TSLA    Tesla 
   NIO     Nio 
   GME     GameStop 
   PLTR    Palantir Technologies 
   OPEN    Opendoor Technologies 
   AMD     Advanced Micro Devices 
   BABA    Alibaba 
   TLRY    Tilray Brands 
   TSM     Taiwan Semiconductor Manufacturing 
   AAPL    Apple 

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-Steve Goldstein

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September 02, 2025 06:52 ET (10:52 GMT)

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