My guess is a love token made from a large cent.
Back in the day people used to black out 1 or both sides of a coin and engrave their initials or some sort of photo on it. They would then give it to their lover. The hole is most likely so they could tie it on to a string as to not lose it. People with not a lot of money would use coppers and people with more money would use silver coins.
Nice Find!
Based on it's size, I'm thinking along the same lines as ARC... horse halter or a blinder rosette.
I've found horse blinder 'hearts' decorated with copper over lead.
"Horse's bridle or hood and prevent a horse from seeing behind and beside him.
Horses that pull wagons and carriages wear blinkers/blinders to prevent them from becoming distracted or panicked by what they see behind the wagon."
If we could see a pic of the back as well, that would help.
Dave