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arkadiusz-sieron

Irma and Gold

September 12, 2017, 9:16 AM Arkadiusz Sieroń , PhD

On Sunday, hurricane Irma made landfall in Florida. What does it mean for the gold market?

Two weeks after hurricane Harvey devastated Texas (and Louisiana), Irma – which is one of the most extreme Atlantic hurricanes over the last decade and the strongest storm which has struck the U.S. since Katrina in 2005 – ruined the Caribbean and Florida, causing at least 43 deaths (5 in the contiguous U.S.). It also left about 6 million Floridians without power and hundreds of thousands in protective shelters. When we analyze the harmful impact of Irma we should also add insurance industry losses, property and infrastructure damage, orange crop loss, increased fuel and food prices, disruptions to business, etc.

Since Irma is still moving, it is hard to estimate its costs. However, AccuWeather estimates that the storm will result in $100 billion in damage. The combined costs of Harvey and Irma may be as large as $290 billion, which amounts to about 1.5%of GDP. Thus, the hurricanes will drag down real economic growth in the third quarter, which should create a positive environment for gold.

However, the price of gold was declining on Sunday and Monday, as the chart below shows. Why?

Chart 1: Gold prices over the three last days.

Gold prices over the three last days

Well, there are two main reasons. First, Irma was widely expected, so the gold prices managed to rise earlier, as investors were preparing for the worst. Second, the impact of the hurricane could have been worse, with all due respect for the victims. When it turned out that Irma was not as catastrophic many weather forecasters had thought it would be (please note that the economic costs of Irma is estimated to be lower than in the case of Harvey), traders become assuaged and decided to take some profits. As weekend events turned out to be better than expected, the U.S. dollar rebounded somewhat (it can be described as a relief rally), while the yellow metal fell.

However, gold may benefit in the long term, as president Trump signed a $15 billion disaster relief bill, which would widen the fiscal deficit. It’s too early to determine it, but if the recent natural disasters ease the U.S. fiscal discipline, gold could gain. Anyway, with the major Irma hit probably behind us (and somewhat eased worries about North Korea), traders will likely focus on macroeconomic factors again, such as the odds of a Fed hike in December. 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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Feb Market Overview

Gold Market Overview

In this edition of the Market Overview, we will examine what the Great Unwind implies for the U.S. dollar and gold. The tightening of monetary policy and higher interest rates could be negative for gold, but more hawkish BoJ and ECB would mean narrower divergence in monetary policies between the Fed and other major central banks.
We will answer the question of why the American currency has been falling like a stone recently, despite the Fed’s tightening cycle. We will also explore the historical bull and bear cycles in both gold and the U.S. dollar, as trend in this currency is likely to be the vital driver in the gold market in 2018.

Read more in the latest Market Overview report.

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