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Harvey and Gold

On Friday, Hurricane Harvey made landfall in Texas (and later in Louisiana), causing catastrophic flooding. The storm caused at least 71 confirmed deaths in the U.S. (and 1 in Guyana), inundated hu...

Last week, hurricane Harvey devastated parts of the U.S. What does it mean for the gold market?

On Friday, Hurricane Harvey made landfall in Texas (and later in Louisiana), causing catastrophic flooding. The storm caused at least 71 confirmed deaths in the U.S. (and 1 in Guyana), inundated hundreds of thousands of homes and displaced more than 30,000 people. It’s probably the worst disaster in Texas history and the second-most costly in the U.S. history. Economic losses are estimated at $81 billion to $108 billion, according to Moody’s Analytics. However, other forecasts are even higher.

Hence, the catastrophe may be positive for the gold market. Harvey may cause some insurance companies to struggle and it may reduce the GDP growth in the third quarter, as well as the job growth in September. Moreover, residents and their spending power may suffer, as many homes in Harvey’s path were not insurance against flood. Importantly, Texas is the second largest economy of the U.S. and the epicenter of its oil industry, so there may be oil supply disruptions. Thus, gold prices should be supported in the third quarter by weak economic data.

However, Harvey should have only temporary effect on the U.S. economy, as the initial slowdown would be recouped later in the year due to reconstruction efforts. Having said this, investors should note that the federal aid for Texas could widen the fiscal deficit. As a reminder, hurricane Katrina triggered an expensive government relief, adding to the federal deficit and supporting gold prices. If this scenario repeats and the fiscal doves strengthen their position in the Congress (Texas is a Republican stronghold, so Republicans are not likely to oppose a rescue package), gold should gain in the medium term. But in the short run, Harvey makes the odds of the government shutdown less likely, which should reduce the safe-haven demand for gold. Indeed, the gold prices sold of yesterday following news that the U.S. debt limit will likely be extended.

Summing up, this week is hot for the gold market. The depreciation of the U.S. dollar, the uncertainty about North Korea and the deadly weather should be positive for the yellow metal in the near future, especially that a new hurricane Irma is threatening to menace the U.S. coastline (it has already hit Puerto Rico). On the other hand, the lower odds of the government shutdown are bearish factor in the gold market. Another factor is today’s ECB meeting, which could move the price of the yellow metal. Stay tuned!

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Thank you.

Arkadiusz Sieron
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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As the markets put the debt ceiling debacle in the rearview mirror, more than a few issues remain open.