Gold prices increase sharply when economic instability occurs

In light of the progress on inflation and the balance of risks, the Committee decided to
lower the target range for the federal funds rate by 1/2 percentage point to 4-3/4 to 5 percent. In
considering additional adjustments to the target range for the federal funds rate, the Committee
will carefully assess incoming data, the evolving outlook, and the balance of risks. The
Committee will continue reducing its holdings of Treasury securities and agency debt and
agency mortgage‑backed securities. The Committee is strongly committed to supporting
maximum employment and returning inflation to its 2 percent objective

Gold prices rose sharply during this period, rising from about $350 an ounce in early 2003 to more than $700 an ounce by mid-2006, an increase of about 100% in just over three years.

The positive performance during this time could be a combination of many factors. Rising inflation has created demand for gold as a complete hedge, and because the pace is only increasing gradually, the opportunity cost of holding gold remains relatively low. As of early September, the Fed is warning of the possibility of cutting interest rates while still reaching standard levels. This environment could be beneficial for gold, similar to the 2003-2006 period.
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