What is Gold Parity Standard?

In essence, the gold parity standard is the modern version of the international gold standard. It is the outcome of the establishment of the International Monetary Fund (IMF) in 1946.

Under the system, all the IMF member countries have to define the par values of their currencies in terms of gold in order to determine their exchange rates for international transactions.

Through gold parity standard, the IMF aimed at maintaining stable exchange rates without giving gold an inevitable status of the monetary standard. It, however, did not disturb the domestic monetary system of the member countries.

The basic features of the gold parity standard are:

1. The par value of currency is defined in terms of gold solely for the value of purpose of determining exchange rates.

2. Gold is not used as a monetary standard of local currencies.

3. A country could follow an independent monetary policy n its domestic affairs.

4. Stability of internal price level is not necessitated by this standard.

5. It permits reasonable flexibility in exchange rates as alternations in par value under the regulations of the IMF are allowed to the member countries.

6. The IMF provides short-term loans to member countries to fulfill their obligations in respect of balance of payments and thereby assist them in maintaining their exchange rates. Thus, the system of gold parity standard rests on the conduct of good international monetary co­operation.

Since 1978, however, in view of its high price fluctuations, gold ceased to play any monetary role at the international level with the Second Amendment to the Articles of Agreement of the IMF (on April, 1978).

Special Drawing Right (SDR) is regarded as an international unit of account and a basic reserve asset. Nonetheless, the central banks of member countries do maintain a gold reserve, but without any direct link with gold in issuing the currency.

Presently, though the Reserve Bank of India maintains a minimum of gold reserves, the value of rupee is not defined in terms of gold. Today, a rupee is just a rupee and nothing else. Its value depends on its purchasing power which is inversely related to the domestic price level.

Nevertheless, though gold has ceased to be very significant as a monetary standard in recent years, it has occupied the highest place in the asset portfolio of individuals. Gold has become a highly speculative commodity owing to the constant fluctuations in its price.

As against other financial assets, gold has assumed a position of highest liquidity combined with profitability which may create altogether a new impact on the internal economy and on the domestic as well as international planes.

In recent years, with the depreciation of dollars, time to time, gold prices are rising high. In international markets, for instance, in January, 2007, US gold price went up to $900 an ounce.

In Indian market, thus, it crossed Rs. 11,500 per 10 gm. In fact, gold price and dollar value usually tend to move in opposite direction.