Tens of thousands of people have been demonstrating all over Egypt over the weekend, with Suez, Alexandria, and Cairo, the biggest cities of the country experiencing heavy protests and and some clashes between the people and president Mubarak`s security forces. There was a nation-wide curfew in effect throughout the country on Saturday and Sunday, but this was disregarded generally. In Cairo, the regime`s police appears to have evaporated completely, while army forces that have replaced them have stayed content with silent observation and prevention of looting by outlaw elements. The regime has tried to intimidate its own people with heavy-handed methods, flying jets over protesting masses in Cairo`s main square, sending helicopters to fly low and harrass the people, and at one point many commentators were speaking about an ominous atmosphere, hinting that some kind of bloody confrontation could be imminent.

That did not come to pass, and we don`t expect the regime to survive. Even the most popular and successful kind of government would generate a lot of resentment after 30 years of continuous, autocratic rule, and the Mubarak regime is anything but popular or successful. What has kept it alive over so many years is American aid, state terror, and a strong oligarchic network of patronage which is a common feature of the autocracies all over the Middle East. Now that U.S.  support is not as strong as it used to be, the regime has only brute force to depend on, but economic difficulties faced by the people blunt the effect of violence.

The man in focus in Egypt is Muhammad ElBaradei, who seems to have succeeded in unifying the fragmented opposition in the country behind himself by brokering an alliance with the influential Muslim Brotherhood on Sunday.  This group has suffered the worst aspects of the regime over many years, and many of their jailed leaders are reported to have escaped from prisons around the country as officials are busy trying to control the streets. By throwing its lot with the highly-respected ElBaradei, the group is taking a pragmatic stance, recognizing that the toppling of the regime is its foremost goal, and that the other issues will only become issues if the country is rid of the dictator.

The regime has lost a lot of prestige by its inability to enforce its will on demostrators, and it is possible that a point of no-return has been passed by the protests entering their sixth day against the clear opposition of the government. Demostrations have been bloody, with more than a hundred of people killed, but at the same time it is clear that the army has maintained a great degree of self-restraint, leaving the dirty work, so to speak, to the regimes secret police, and special security forces. This one peculiar fact has been the main reason of the demonstrations` success so far, since it is probable that if the army had been moved to stage a brutal crackdown, of the kind effected by Hafiz Assad in the 80s, or Saddam Hussein during his years of his rule, even the most ardent revolutionary would have to give in and scramble for his life. Flesh doesn`t cut steel.

We believe that the Middle East, and the world are entering a new, and dangerous stage with the collapse of the established order in the Arab World. Egypt is a huge country with 79 million people, a GDP of $500 billion on a PPP basis, and has played an important role in setting the direction of the region since the breakup of the Ottoman Empire in art, culture, and science with the Arab world`s only four Nobel Prizes going to Egyptians. The Egyptian Ahmed Zewail is the only winner of a Nobel prize for scientific work in the entire region. In short, what happens here will set the trend in the Arab World, and by the familiar domino effect, in the world of finance and economics.  

In response to all these, short-term borrowing costs for emerging market debt are rising at the fastest pace since 2008. The Egyptian banks and its stock market are closed. Global markets have shown a mixed performance so far, and the Euro is also doing well as it perhaps seems like a safer haven in all this turmoil. Gold has been falling, predictably, as expectations of rising inflation and risk compel speculators to expect higher interest rates, and lower demand for gold around the world. We expect gold to keep falling, but at the same time, we remain confident that the longer term uptrend will remain in place as long as developed world rates are low.