Gold peg

From Wikipedia, the free encyclopedia

Gold Peg is a term for the par value in gold of a particular currency. It is associated with a gold standard or bimetallic standard for a currency. Since the ability to redeem notes for a fixed amount of gold is one of the attractions of a hard currency standard, keeping a particular stated gold peg is considered a matter of confidence for a currency. A government devalues its currency if it increases what it will pay in that currency for a weight of gold. In European history, the unit of gold which has been used is the troy ounce, with 12 troy ounces to a troy pound.

A peg is almost never exact, generally there is a trading range of gold to a currency. During the 20th century, the most important price was the London Gold Fix which set the price for gold for physical settlement between five important market makers in London. While the spot price often differed from "the Fix", it was widely quoted and used as a bench mark for futures prices and other settlements in gold.

There are a variety of reasons why a government or bank would want to devalue currency, either because of a desire to print more notes, or a lack of reserves to pay demands. A currency where gold is leaving the country is said to be "under pressure" and steps taken to keep the peg in place are said to be "defending" the currency. These terms have continued even after the international monetary standard is no longer based on specie.

Pegs exist in monetary policy that are not to gold, for example a dollar peg means that a currency is closely tied to the dollar.