Goldman Sachs Could Miss Earnings This Quarter
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I think we’re going into a tough quarter for Goldman Sachs (NYSE: GS). The bank will find it difficult to thrive with all this market volatility.
Goldman Sachs institutional client services
Source: Goldman Sachs
In the first quarter, Goldman Sachs reported a 10% year-over-year decline in its institutional client-services segment, which handles all of the fixed income, currency, and commodities execution. With the recent decline in the price of gold and silver, I could only imagine things getting worse inside of this Goldman business segment. The broader stock market also declined, so it’s highly probable that the stock trading division could report a year-over-year decline on earnings.
Asset management flows have been on the decline over the past of couple months. More particularly, mutual funds seem to be gaining in assets under management. The trouble over at Goldman Sachs is that this declining growth in assets under management, recent equity sell-off, and volatility across currencies and commodities will make for a difficult quarter.
Analysts on a consensus basis anticipate that the company will grow earnings by 65.7% year-over-year. The hoped-for outcome is that the bank has some hedges against market volatility, or will experience the added benefit of volume, which would increase the amount of revenue earned from client-execution services.
However, in the previous quarter the company’s earnings report indicated a year-over-year decline in the amount of revenue earned from client-execution services and this was because of bond market, currency market, and gold volatility. I think there’s a very real possibility that Goldman Sachs could miss earnings this quarter.
Gold and silver a nightmare
The Federal Reserve has plans of cutting back its monetary easing practices over the next two years. This means that gold and silver investors are in for a major decline in the value of these commodities.
The SPDR Gold Trust (NYSEMKT: GLD) ETF has declined by 17.7% over the past year, and the iShares Silver Trust (NYSEMKT: SLV) ETF has declined by 25.8% over the same period. The decline in both ETFs is exacerbated by the fact that the Federal Reserve will consider some tapering of bond purchases toward the end of 2014. One of the best arguments to being a gold and silver bull was the money printing of the Federal Reserve and the potential of run-away inflation.
In the gold and silver market, the value is based on the perception of the commodity. If the commodity is perceived to have future value investors will buy it in hopes of future price increases. But without the hopes of rampant inflation, both silver and gold are being sold off.
Source: Federal Reserve Bank
Over the long term, personal-consumption inflation is projected to be at 2%. So if anything there’s not going to be Zimbabwe-like hyper inflation. If that’s the case, then there was no logical basis for hedging dollar inflation by over bidding the value of both silver and gold over the past 10 years.
The SPDR Gold Trust has rallied by 130% over the past 10 years, and the iShares Silver Trust rallied by over 59% in the same period. The rate of inflation has increased by 26.6% over the past 10 years.
Basing the analysis purely on inflation metrics, I believe that both silver and gold have even further downside. Over the past 10 years, both silver and gold should have only appreciated by 26.6% for the store of value argument to work. I believe that silver, therefore, is overvalued by 30%, and gold is overvalued by 100%. The perceived value of both gold and silver should be altered to an investment hedge against inflation. Because inflation is likely to be so low, the value of gold and silver should decline even further over the next two-to-three years.
Goldman Sachs could have a bit of difficulty with beating analyst estimates this quarter. The bank doesn’t do very well in periods of extreme volatility. The bank will lose some money from its institutional client-services segment, paired with declining performance fees from asset management, and mark-to-market accounting losses from stock depreciation.
That being the case I predict more downside in the value of gold and silver. The fundamentals surrounding the commodities do not support the current market value.
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Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!