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I assume you calculated the effective growth rate for gold ("effective interest rate for gold") from 1720 to 2014 assuming annual compounding. This does indeed

I assume you calculated the effective growth rate for gold ("effective interest rate for gold") from 1720 to 2014 assuming annual compounding. This does indeed give a rate of roughly 1.78% per annum, compounded annually. (Also known as CAGR) However, this rate cannot be directly compared with a bond coupon rate. Bond coupons are cash flows that are not automatically reinvested/compounded. Even if one were to reinvest them, one would have to reinvest at the prevailing yields at the time the cash flows were received, a somewhat more involved calculation. So that 2.5%-4.0% coupon rate does not represent an annually-compounded rate and thus is not directly comparable to a CAGR. Apples and oranges, so to speak.

graeme 12y ago
To add context to this, I ran a calculation of simple interest and compound interest you'd receive for an initial investment of £4.31 over the 294 years from 1720 to today. I assumed a 3% return. Simple interest, not reinvested: £42.32 Compount interest: £25,622.49 As the parent poster pointed out, the actual return for a bond bought in 1720 depends on what the holder did with the returns. Whereas with gold, merely holding £4.31 worth of gold from 1720 would yield £768 of gold today. I found this calculation interesting in that it demonstrates the true power of compound interest if maintained. Of course, such a return is actually very hard to maintain over a 300 century timespan.
- BrentOzar 12y ago
  > Of course, such a return is actually very hard to maintain over a 300 century timespan. You mean 3 century timespan, or 300 years. (Although it would be spectacularly difficult over a 300 century timespan.)
MarkMc 12y ago
Sure, but in this case wouldn't the 'prevailing rate at the time the cash flows were received' generally have been higher than the original coupon? Presumably the reason UK government waited 294 years is because the interest rate on UK gilts has never dipped significantly below the original coupon rate until now.
- stygiansonic 12y ago
  Yes, I believe your original point that bonds would have been a better investment than gold still holds. But the way to compare that would have been to look at the "total return", i.e. assuming coupons had been reinvested, etc. (For example, there is an S&P 500 total return index whose growth reflects the theoretical reinvestment of all received dividends) I don't know if there is such a metric for these gilts, but if there is, then that total return rate would be more or less directly comparable to the CAGR for gold. (Side note: Total return may not always apply in the real world, as the cash flows received may not be sufficient for reinvestment. Simple example: A bond with a face value of $1,000, coupon of 5%, payable each year. Assume that new bonds are issued each year with the same face value and that the face value is also the minimum purchase amount. Your yearly coupon of $50 from the original bond is not enough to buy new bonds and so it remains uninvested. Things like mutual funds/bond funds/bond ETFs attempt to solve this problem by allowing you to reinvest small amounts, albeit at the expense of charging you a management fee.)
saretired 12y ago
Except the UK Treasury fixed the price of gold at £3.17s10.5d in 1717 and the price didn't change for ~200 years until the UK left the gold standard in 1931. So, zero compounding for 211 years. The fixed price was set by Newton, btw.

graeme 12y ago

To add context to this, I ran a calculation of simple interest and compound interest you'd receive for an initial investment of £4.31 over the 294 years from 1720 to today. I assumed a 3% return. Simple interest, not reinvested: £42.32 Compount interest: £25,622.49 As the parent poster pointed out, the actual return for a bond bought in 1720 depends on what the holder did with the returns. Whereas with gold, merely holding £4.31 worth of gold from 1720 would yield £768 of gold today. I found this calculation interesting in that it demonstrates the true power of compound interest if maintained. Of course, such a return is actually very hard to maintain over a 300 century timespan.

BrentOzar 12y ago
> Of course, such a return is actually very hard to maintain over a 300 century timespan. You mean 3 century timespan, or 300 years. (Although it would be spectacularly difficult over a 300 century timespan.)

MarkMc 12y ago

Sure, but in this case wouldn't the 'prevailing rate at the time the cash flows were received' generally have been higher than the original coupon? Presumably the reason UK government waited 294 years is because the interest rate on UK gilts has never dipped significantly below the original coupon rate until now.

stygiansonic 12y ago
Yes, I believe your original point that bonds would have been a better investment than gold still holds. But the way to compare that would have been to look at the "total return", i.e. assuming coupons had been reinvested, etc. (For example, there is an S&P 500 total return index whose growth reflects the theoretical reinvestment of all received dividends) I don't know if there is such a metric for these gilts, but if there is, then that total return rate would be more or less directly comparable to the CAGR for gold. (Side note: Total return may not always apply in the real world, as the cash flows received may not be sufficient for reinvestment. Simple example: A bond with a face value of $1,000, coupon of 5%, payable each year. Assume that new bonds are issued each year with the same face value and that the face value is also the minimum purchase amount. Your yearly coupon of $50 from the original bond is not enough to buy new bonds and so it remains uninvested. Things like mutual funds/bond funds/bond ETFs attempt to solve this problem by allowing you to reinvest small amounts, albeit at the expense of charging you a management fee.)

saretired 12y ago

Except the UK Treasury fixed the price of gold at £3.17s10.5d in 1717 and the price didn't change for ~200 years until the UK left the gold standard in 1931. So, zero compounding for 211 years. The fixed price was set by Newton, btw.