Gold and the Lindy Effect

Written by Luke Burgess
Posted April 21, 2021

A co-worker recently proposed an argument for gold using what statisticians call the Lindy Effect.

What is the Lindy Effect?

Well, the basic idea behind the Lindy Effect is that the life expectancy of some things is proportionate to their current age.

In other words the longer something exists, the longer we should expect it to continue existing.

Now, right off the bat you can probably think of a million things to which the Lindy Effect would not apply — the life expectancy of a human being, for example. Just because an individual has lived for 80 years, there is no good reason to expect that person to live another 80 years.

That's why the Lindy Effect is said to be strictly limited to non-perishable things... but only some non-perishable things. Obviously the shelf life of a can of corn is not proportionate to its current age.

Examples where the Lindy Effect does occur are said to be found in fashion and fads, entertainment, technologies, and ideas.

My co-worker proposed applying the Lindy Effect to gold. The idea is that since gold has been used as a store of wealth for over 5,000 years, we can reasonably expect it to continue to be used for that purpose for another 5,000 years.

Well, I think he's correct that gold will remain a monetary asset for thousands of years to come. But I don't think the Lindy Effect has anything to do with it.

In fact, basing any expectations on the Lindy Effect seems to me deeply flawed.

In his 2012 book Antifragile: Things That Gain from Disorder, Nassim Taleb explains the Lindy Effect like this:

If a book has been in-print for 40 years, I can expect it to be in print for another 40 years. But, and that is the main difference, if it survives another decade, then it will be expected to be in-print another 50 years. This, simply, as a rule, tells you why things that have been around for a long time are not "aging" like persons, but "aging" in reverse. Every year that passes without extinction doubles the additional life expectancy.

Maybe I'm not wrapping my noodle around the concept correctly. But to me there seems a problem with this explanation.

Specifically, if we're talking about a book that's currently in-print, where “every year that passes without extinction doubles additional life expectancy,” how could it ever go out of print?

If every year that passes doubles this book's life expectancy, isn't its life expectancy infinite?

That's not the case with most books. Most books don't stay in-print indefinitely.

In fact from what I understand, the Lindy Effect can only be correct half of the time. Here's what I mean...

Let's say a book was published in 1900.

And by 1950, this book was out of print.

So the entire print run of this book is only 50 years.

Those are the historic facts.

OK, so...

In 1901, if you had used the Lindy Effect to predict that the book would be in-print for another 12 months, you would have been correct.

In the next year, 1902, if you had again used the Lindy Effect to predict that the book would be in-print for another 2 years, you would have again been correct — the book would be in-print until at least 1904.

And every year following that, if you had used the Lindy Effect to predict this book's life expectancy, you'd be correct...

... Until 1926.

In 1926, the book has now been in-print for 26 years. So the Lindy Effect would have you assume it will be in-print for another 26 years. But it won't. Remember, we've already established this book went out of print in 1950.

Every year past 1926, until the book is out of print in 1950, an assumption that this book's shelf life is proportionate to its current age would have been incorrect. So from how I understand it, predictions based on the Lindy Effect can only be correct half the time.

Perhaps above all, though, the Lindy Effect does not take into account any of the deep complexities that create a maelstrom of chaos that exists in any large market or system. It is... an oversimplification. There's no guarantee that a building which has stood for 1,000 years won't be knocked down tomorrow by an earthquake... or a volcano... or a hurricane... or war... or terrorism... or Godzilla... or alien invasion... Most of these are within the realm of possibility.

My point is, I don't think the Lindy Effect is of much use at all. So the argument that since gold has been used as a store of wealth for over 5,000 years, we can reasonably expect it to continue to be used for that purpose another 5,000 years doesn't hold much water for me.

More often than not, writers try to come up with new angles to tell the same story. And I'll admit, I'm guilty of that myself. And, really, that's what an argument for gold using the Lindy Effect is: an angle.

But the truth is, gold doesn't need an angle.

Gold is special enough on its own.

It doesn't need accoutrement to make it any more attractive.

In fact, I think the bells and whistles only serve to weaken the fundamental argument for gold. Eric Kaplan, a comedy writer for Warner Bros. shows like "Young Sheldon," "The Big Bang Theory," and "Futurama," explains this from a different perspective:

There’s a comedy writing bit of trade-speak called, depending upon what room you work in, “bananas on bananas” or a “hat on a hat.” It’s a bad thing. If you do it, you’ve made a mistake. The idea is that sometimes a joke works but if you add something extra, you will make it worse.

It’s counter-intuitive. Hats are funny, why wouldn’t more hats be funnier? Bananas are funny, why wouldn’t an extra banana be funnier?

Kaplan concludes, “It’s not so easy to summarize. But if you add the wrong thing to it, you ruin it.”

The same thing happens with gold — as well as a million other investment assets. People try to make all these different arguments for why gold is valuable and special in hopes of spreading the word. But it ends up backfiring. Conflating the Lindy Effect with gold is a hat on a hat. It's ultimately unnecessary.

Here's the truth of why gold has been used as a monetary asset and store of value for thousands of years...

Necessity.

That's what all it boils down to.

Our ancestors didn't use gold as money because they liked it or they thought it was pretty. They used gold as money simply because it was the best material for the job.

Some form of money (a medium to store and exchange labor) is required for an organized society. But what should that form of money be?

Well it turns out that gold — atomic number 79 — is almost perfectly suited for that role.

There are a number of other metals the ancients could have used as money. But they chose gold because it has special chemical properties that make it best fit for the job.

First, gold is very malleable. It can be easily worked with by hand. No specialized tools are required in shaping the metal. Other metals are much harder to work with and can be brittle.

Gold is also fungible — it's mutually interchangeable. It's homogeneous — pure gold is completely consistent throughout. Gold is easily divisible into standardized weight. Gold will never tarnish or rust — it is the most corrosion-resistant and oxidation-proof metal in the known universe. The last thing you want is for your money to be physically rusting away.

Gold is also easily-identifiable — it's one of only two colored metals. Gold is yellow. Copper is brown. The rest of the metals are silver-colored, or only have slight-colored hues. That property alone made gold extremely useful as money to pre-science humans.

For all of these reasons, gold was simply the best-suited material for the job of money.

That's the secret behind the curtain — the boring truth behind gold: Gold is valuable because society needs money. And the best money known to man is gold. It's valuable because it's necessary.

Gold will likely remain valued as a store of wealth for another 5,000 years. But it won't be because it has already been that way for the past 5,000. Gold will remain a store of wealth because of its special chemical and physical properties that make the metal useful as a monetary asset.

Until next time,
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Luke Burgess

Luke’s analysis and market research reach hundreds of thousands of investors every day. Through his work with the Outsider Club and Junior Mining Trader, Luke helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.

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