Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

Goldman Sachs Group Inc (GS) Could Miss Earnings This Quarter

I think we’re going into a tough quarter for Goldman Sachs Group Inc (NYSE:GS). The bank will find it difficult to thrive with all this market volatility.

Goldman Sachs institutional client services

undefined

Source: Goldman Sachs

In the first quarter, Goldman Sachs Group Inc (NYSE:GS) 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.

Source: YCharts

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 Group Inc (NYSE:GS) 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 Group Inc (NYSE:GS) 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.

Source: Ycharts

The SPDR Gold Trust (ETF) (NYSEMKT:GLD) has declined by 17.7% over the past year, and the iShares Silver Trust (ETF) (NYSEMKT:SLV) 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.

Source: Ycharts

The SPDR Gold Trust (ETF) (NYSEMKT:GLD) has rallied by 130% over the past 10 years, and the iShares Silver Trust (ETF) (NYSEMKT:SLV) rallied by over 59% in the same period. The rate of inflation has increased by 26.6% over the past 10 years.

Source: Ycharts

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.

Conclusion

Goldman Sachs Group Inc (NYSE:GS) 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.

The article Goldman Sachs Could Miss Earnings This Quarter originally appeared on Fool.com and is written by Alexander Cho.

Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs. Alexander is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

DOWNLOAD FREE REPORT: Warren Buffett's Best Stock Picks

Let Warren Buffett, George Soros, Steve Cohen, and Daniel Loeb WORK FOR YOU.

If you want to beat the low cost index funds by 19 percentage points per year, look no further than our monthly newsletter.In this free report you can find an in-depth analysis of the performance of Warren Buffett's entire historical stock picks. We uncovered Warren Buffett's Best Stock Picks and a way to for Buffett to improve his returns by more than 4 percentage points per year.

Bonus Biotech Stock Pick: You can also find a detailed bonus biotech stock pick that we expect to return more than 50% within 12 months.
Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.