Goldman Sachs' commodities trading risk has hit a near seven-year low, quarterly results on Wednesday showed, suggesting the Wall Street giant had become less aggressive lately in taking advantage of surging oil, metals and grains prices.

Goldman's Value-at-Risk (VaR) for commodities stood at $23 million for the fourth quarter ended December 31. That was down 20 percent from the $29 million in the third quarter and almost 40 percent lower than the $38 million seen a year earlier.

VaR is an industry measure for how much of a bank's money is at risk on a day for trading an asset class. Goldman's VaR is watched particularly as it is the world's largest investment bank and one of the biggest in commodities trading.

Goldman raised its risk in equity and currency trading during the fourth quarter. But it slashed its commodities VaR, bringing it to the lowest since the first quarter of 2004 and trailing rival JPMorgan Chase, which assumed a higher risk for commodities in the fourth quarter.

(For a Reuters graphic on Goldman's commodities VaR by the quarter, click on http://r.reuters.com/nyt27r )

Commodity markets, as measured by the Reuters-Jefferies CRB index, rose 16 percent in the fourth quarter of 2010. That was the biggest quarterly rise in two years as oil, copper and corn hit highs last seen before the financial crisis.

While the largely one-way direction in price meant less volatility to drive up a bank's VaR, Goldman's sharply pared commodities risk suggested to some that it was putting on fewer of the big, voluminous trades for which it was once known.

I think Goldman is consciously making smaller bets on commodities, said Matt McCormick, banking analyst at Bahl & Gaynor in Cincinnati, Ohio. Any time you go back to a low of 2004, you are clearly making a substantial call.

Wall Street banks had curtailed trading last year partly to comply with the Volcker Rule in the United States, which disallowed more than 3 percent of a bank's capital to be used for trading in assets that included commodities.

While the reduction in so-called proprietary trading could be one reason for lower revenues, Goldman said a 53 percent decline in profit during the fourth quarter was partly due to a drop in business conducted for clients.

It said net revenue in fixed income, which includes commodities, slid 39 percent, reflecting generally low client activity levels. Institutional client services, which account for the bulk of fixed income, fell 50 percent from a year earlier.

Going forward, analysts expect Goldman's clients generally to decide how much its risk expands across the asset classes, given the bank's renewed emphasis on trading for customers' accounts rather than its own.

We haven't heard anything in our meetings and discussions with them that indicates a change in this, said Oliver Pursche, president at Gary Goldberg Financial Services in Sufern, New York, which owns Goldman stock.

If risk continues to shrink, one reason could be that Goldman is diverting more of the proprietary trading it previously conducted on its investment banking account to its fund management division, Goldman Sachs Asset Management.

Since it's not bank capital but fund money, it will be a way of circumventing the Volcker Rule, Pursche said.

Goldman's commodities VaR by quarter (in million dollars):

Q4 Q3 Q2 Q1

2010 23 29 32 49

2009 38 27 40 40

2008 38 51 48 38

2007 25 24 24 30

2006 29 31 31 30

2005 25 25 24 28

2004 27 25 24 15

Note: Maximum loss expected in a day, based on a 95 percent confidence level that takes into account all but 5 percent of potential scenarios.

(Editing by Marguerita Choy and Dale Hudson)

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