Goldman looks to cash in on commodities

A strong outlook justifies the investment bank's ramping up its trading activity in the sector.

By Trefis Oct 1, 2012 10:31AM
Fotog, Tetra Images, CorbisGoldman Sachs (GS) analyst Jeffrey Currie issued an upbeat report on the global commodities market. The considerably positive outlook for commodity prices over the next 12 months will most likely result in the investment bank's increasing its focus on commodities trading soon.

Currie believes returns from commodities for the period will be more than 18%, and he expects almost half of the gain to be realized by the end of this year.

Goldman Sachs, with its strong position and considerable expertise in the highly competitive commodities trading market -- which includes global investment banking giants like UBS (UBS), Deutsche Bank (DB), Morgan Stanley (MS) and Barclays (BCS) -- is positioned well to derive maximum value from such an uptick.

We have a $122 price estimate for Goldman Sachs, which is at a premium of less than 10% to the current market price.

Great commodities track record

In its annual report last year, Goldman reported commodities trading income of $1.5 billion in 2011 and 2010. That figure is notably lower than almost $4.6 billion that the bank earned from commodities trading in 2009 because of the marked recovery in commodity prices that year after the slump in 2008. The figure for 2011 is particularly important, as it represents about a sixth of Goldman's trading revenues.

Not only is commodities trading an essential part of Goldman's trading portfolio, but it also provides a hedge for the bank's extensive trading operations -- as commodity prices to a large extent tend to move in the opposite direction to debt and equity market prices.

We include Goldman's commodities trading income in our analysis as part of our Bonds, Currencies & Commodities business division. The yield for this division is represented in the chart above.

Future holds promise

If Currie's forecasts are accurate, commodities will outstrip nearly all other asset classes in the coming three months. The estimated commodities return of 8.6% for the rest of the year is more than what is forecast for equities, medium-term government and corporate bonds as well as various currency pairs like euro-dollar and dollar-yen.

Over a 12-month period, the 18.2% return estimated comes from 26.5% addition in value for energy (oil, coal, natural gas), 10% for industrial metals (aluminum, nickel, zinc, iron) and 6% for precious metals (gold, silver).

Goldman has reduced its exposure to the global commodities market over the recent years, evident from the decrease in its commodities portfolio size from over $13 billion in 2010 to $5.8 billion in 2011. But the strong forecast for commodities would justify a move by Goldman to ramp up its commodities business again in order to tap it for maximum revenues.

What remains to be seen is how well the investment bank fares, and to what extent this forecast comes true.



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