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.