Unrest in Tunisia and Egypt Highlight that Fear and Uncertainty Drive Commodities

Unrest in foreign nations cause equities to decline but gold and oil (and even cacao) to rise as commodities provide a safer haven.

Tunesia is a small nation on the North African Mediterranean Coast. According to the CIA World Factbook, ‘the country's first president, Habib Bourguiba, established a strict one-party state. He dominated the country for 31 years, repressing Islamic fundamentalism and establishing rights for women unmatched by any other Arab nation. In November 1987, Bourguiba was removed from office and replaced by Zine el Abidine Ben Ali in a bloodless coup. Ben Ali is currently serving his fifth consecutive five-year term as president. Tunisia has long taken a moderate, non-aligned stance in its foreign relations. Domestically, it has sought to defuse rising pressure for a more open political society.’  What is not stated here is the recent unrest that sent President Zine al-Abidine Ben Ali packing his bags and fleeing the nation.

December 17, 2010 will stay in the minds of Tunisians. On that day citizen Mohamed Bouazizi set fire to himself when officials in his town prevented him from selling vegetables on the streets of Sidi Bouzid without permission.  This set off protests about the unemployment and impoverished situation of the citizens. Seventy-eight people have been killed in the subsequent protests.

Fast forward about one month and the Tunisian mentality spread to Egypt. These anti-corruption protests have now turned violent. Egyptian President, Hosni Mubarak has declared a curfew. The military has been called out, and tanks are now in the streets.

This spread of violence and possible coups d'etat of two nations bring obvious concern. But, why should Americans worry? They are located in a hostile region and half a world away anyway, right? Well, yes, there is some distance, but we live in an internationalized world. Moreover, Egypt has a crucial trade passageway – the Seuz Canal. This potential closure would drastically affect the oil price. As of the close of this week and after four days of Egyptian rioting, oil is up. Today, alone, crude oil was up 4.24%.

Although the US dollar also got stronger because of a flight to certainty, gold had a higher run. Gold rose $23.50 today. This $23.50 is a bit deceiving because the figure factors a -0.54% change because of the strength of the US dollar. While this is a paltry gain of 1.79%, it highlights that the greater the uncertainty, the more a flight to the known. Gold is known. Equities had the largest decline since November 2010 because of this flight from uncertainty.

As the world is subject to more and more globalization/internationalization, effects locally have global repercussions. When one watches the news, from an investing perspective, one must question where does this fit in the ‘international web’ of finance. This recent unrest half a world away has had noticeable repercussions domestically. To further exemplify this point, the Republic of Cote d'Ivoire (Ivory Coast) recently banned the export of Cacao beans. With this cacao beans rose 4%. This ban was also the result of political unrest.

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