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Goldman’s Commodity Revenue Shocks Markets As Company Reports Earnings

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Goldman’s Commodity Revenue Shocks Markets As Company Reports Earnings

(Kitco News) - Goldman Sachs’ much talked about commodities-trading team surprised the markets this week as it reported the worst annual performance in the company’s history in 2017, down 75% in net revenue. This coincided with Goldman’s bearish gold forecasts that never came to be.

Commodities trading revenues dropped from $1.1 billion in 2016 to below $300 million last year, Bloomberg reported on Tuesday, citing people familiar with the matter.

This put Goldman behind its long-standing rival Morgan Stanley, which had a revenue of more than $600 million last year, according to reports.

Weak gas and power performances were partly responsible for such a weak year.

“The slump means the bank’s storied natural resources unit fell behind competitors such as Morgan Stanley, where net revenue in the sector rose by about a fifth last year, one of the people said -- a reversal of fortunes for the two banks known as the ‘Wall Street refiners’,” Bloomberg wrote.

It was clear that the commodities unit was in trouble after Goldman published its 2017’s second-quarter performance report. Poor results in the first half of the year led to an informal review of the unit as well as several of its employees, including global commodities head Gregory Agran.

Goldman’s commodities trading have been on a decline since 2009, when revenues were up at $3.4 billion, but this is the largest annual drop since then.

Despite poor results, Goldman doesn’t seem to be giving up in its commodities trading department, reportedly hiring at least seven new employees in the past few months.

The news of weak performance came just one day before Goldman’s fourth-quarter earnings, which revealed higher than expected earnings of $5.68 a share, with revenue at $7.83 billion.

But, the revenues from fixed income, currencies and commodities markets were down dramatically, falling 50% from the levels seen a year ago.

Goldman said trading was “a challenging environment characterized by low levels of volatility and low client activity,” according to the company’s press release.

Poor commodities earnings also coincided with Goldman’s miscalculation of the gold market. 

In the end of June, the investment bank projected the metal to be around $1,250 an ounce in early 2018. But now, spot gold and February Comex gold are trading solidly above $1,330.

On top of that, in its latest December forecast, Goldman still remained bearish on gold, estimating prices to slide to around $1,200 in the middle of 2018 and then to rise to $1,375 by the end of 2020. 

“Rather we see the decline in gold as evidence that ‘fear’ effects, which had been keeping gold supported, have at least partially moderated as U.S. tax reform and the transition to a new Fed chair appear to be going smoothly,” Goldman said in December.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
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