Banks active in commodities have been hammered so far in 2017.
According to reporting in the Financial Times, income from commodity trading and related activities at Goldman Sachs, Citigroup, JPMorgan and nine other investment banks dropped 40% in Q1 2017, and the struggles have continued into the second quarter.
Revenues shrank as banks became more wary of doing business with cash-strapped oil companies after the price of crude dropped below $30 a barrel. At the same time, there was little or no incentive for producers to hedge output at loss-making prices.”
Goldman Sachs was the hardest hit. Its problems extended into the second quarter with another 40% plunge in fixed income, currencies, and commodities revenues. According to CNBC, the bank recorded its worst commodities quarter ever. Goldman CFO Martin Chavez called it a “challenging environment on multiple fronts.”
Not surprisingly given the results, it was a difficult quarter on all fronts … The market backdrop was challenged, client activity remained light and we didn’t navigate the market as well as we aspired to and as well as we have in the past.”
Coalition commodities editor Neil Hume noted that while the sector struggled generally, precious metals “performed significantly better.”
Oil and Base Metals underperformed as concerns on the outlook for the energy sector curtailed banks’ risk appetite. Precious Metals performed significantly better following increased investor demand.”
Gold was up 8.5% in the first quarter of 2017. Despite Federal Reserve interest rate hikes and other headwinds, it has maintained those gains through the second quarter. Demand in the US has fallen precipitously, but Asian demand has more than made up for it. Indian gold imports have already topped the total for all of 2016.
Silver also outperformed the general commodity trend, rising 14.6% in Q1. It has given back some of those gains, but the white metal is still up 2.4% on the year.
While volatility in the energy sector was the primary cause of the struggle in commodities, according to the Financial Times, there is a broader downward trend driven by structural factors.
Many investment banks have scaled back or pulled out of commodities because of increased regulation that has crimped returns, and investor backlash against raw materials as an asset class. In 2015, income from commodities at big banks dropped 18% to $4.6 billion, down two-third from its peak in 2008.”
It’s not surprising that gold and silver haven’t followed the more general commodity trend. These precious metals aren’t really commodities in the true sense of the word. While gold and silver do serve a commodity-like role in the economy, they are in the truest sense money, and historically serve as a store of value. People don’t buy gold and silver simply because they are important inputs in the production chain. They buy gold and silver to protect and build their wealth. As Jim Rickards once said, ““I think of [gold] as money. If you want money, have some gold…”