Is this the end of the bull run for share prices and precious metals?

Share prices on the JSE, as well as on global bourses, had a big downward correction on Friday. After four weeks of exceptional robust growth, the All Share index wiped out a big part of its losses last Friday alone.

After breaking quickly through the 125 000 point new record level (125 249) last Thursday, recording a growth of 9 417 (8.13%), since the beginning of the year, the index experienced its greatest one day pull back over the last year of 4.15% on Friday, to close on 120 026. The index increased by 14.21% over the past three months and over the last year gained 46.2%.

The big pullback in shares in the JSE was as expected by analysts, given the fear that commodity prices, especially precious metals, will end their strong bullish movement of the last six months. This indeed was the case as commodity prices took a big hiding on Friday. On the day the price of gold tumbled by 9.3% to $4 874 per ounce, the platinum prices lost 19.42% to $2 130, the palladium price pulled back by 14.40% and the silver price by a massive loss of 28.2% on Friday alone.

Speculative short trading of precious metals

The main reason for this “top blow off” seems to be speculative trading as short-term speculative traders flood in, leading to sharp swings in either direction, since Thursday when a massive buying of precious metals, after the Federal Reserve kept its Bank rate unchanged to an unprecedented speculative sell-off on Friday. This despite the nomination by the US President Donald Trump of Kevin Warsh to be the next chair of the Federal Reserve, bringing the independence of the Federal Reserve in big jeopardy. Warsh aligned himself with the US President in 2025 by arguing publicly for lower interest rates by the Fed, going against its longstanding reputation as an inflation hawk.

The only notable other headlines in favor of a stronger US dollar and a sell-off of commodities have been a dash of positivity around the potential that the US government will avoid a shutdown at the end of the month. The combination of these factors triggered the selloff as described by analysts as profit-taking. Traders argue that the precious metals market was due for a correction and the triggers behind the selloff could be a combination of factors, ranging from the Fed chair announcement to broader macro flows.

The Rand followed the speculative selloff commodities

The exchange rate followed in tandem the huge speculative selloff of commodities on Friday. The currency, during the first four days of trading last week, appreciated 40 cents against the US dollar to R15.74/$, just to lose almost all the gains to close Friday flat for the week on R16.12/$. Against the Euro and the Pound, the Rand followed the same tendency. The currency improved from R19.07/€ with 23 cents to R18.84/€ last Thursday, just to close weaker on Friday at R19.14/€. Against the Pound the Rand initially gained 26 cents to R21.74/£ by Thursday, losing 35 cents again on Friday and ended the week weaker by 9 cents on R22.09.

The more cautious stance by the Reserve Bank’s Monetary Policy Committee (MPC) by not lowering the repo rate could not prevent this speculative selloff in the precious metals markets and the foreign exchange market. This only underlines the warning by the MPC at its news conference on Thursday that an adverse scenario may develop where: "the rand weakens and oil goes up again. We anticipate that headline inflation will rise over the next few months, peaking at around 4% in such a scenario".

Prospects for the petrol price, and the repo rate.

The speculative selloff commodities on Friday and the much stronger dollar wiped out a big part of prospects for lower petrol prices during the beginning of February. By Thursday, 29 January, given a Rand/$ exchange rate of R15.74/$ the price for 95 petrol was 65 cents and the price for 0.05% diesel 50 cents over-recovered. The much weaker Rand/Dollar on Friday and the oil price near $70 per barrel, will make an enormous difference on the over-recovery, but will not wipe out the whole amount. However, if the tendency continues in February, consumers may find a sharp increase in fuel prices at the beginning of March.

Expectations for the coming week.

After an eventful week for global markets with wild price swings, geopolitical risk, central bank meetings and a new Fed chair nominated, analysts and financial markets will evaluate if the speculative selloff of commodities last week will continue. After the announcement by President Trump that he asked Kevin Warsh to become the new Fed chair, the US dollar got stronger continuing to show signs of stabilising after recent weakness. The dollar index, which measures the greenback against a basket of currencies, rose 0.57% to 96.73, with the euro down 0.54% at $1.1904. The main question now is if this tendency continues this coming week?

The release of the US non-farm payrolls for January this coming Friday will overshadow global financial markets outlook for the week. Elsewhere the Bank of England (BoE) and the European central Bank (ECB) will announce their latest interest rate decision. Most countries, including South Africa will release various Purchasing Power Indices (PMI’s). The announcement by the Minister of Mineral and Petroleum Resources on fuel prices set for February will also influence financial markets.

Chris Harmse is the consulting economist of Sequoia Capital Management and a senior lecturer at Stadio Higher Education.

*** The views expressed here do not necessarily represent those of Independent Media or IOL.

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