Could hear a muffled roar in commodity prices, Bird says

“Low inflation and high real interest rates are not the stuff commodity price increases are made of,” Anthony Bird, an independent economic consultant, told members of a gold conference in London, England last week.

“As a result, I do not foresee a big bang in commodity price increases,” he said, “but more of a muffled roar.”

Mr Bird, who held the position of Research Director of the Commodities Research Unit in London before becoming a consultant in 1978, says commodity suppliers are investing in modernizing plant capacity but this has not resulted in significant net expansion of capacity. This could play an important role in forcing commodity prices up since expansion is well below the rate of growth of demand for commodities.

The manufacturing industry’s reaction to low commodity prices in recent years has been to increase metal usage, in Mr Bird’s view. “Manufacturers are no longer taking the trouble to produce lighter products,” he says.

High real interest rates and “just- in-time” commodity purchases have led to low commodity prices in recent years. But in Mr Bird’s opinion, the period of holding low commodity stockpiles is coming to an end. “Stockpile managers are becoming increasingly nervous about the possibility of higher prices.”

Although this outlook for commodity prices seems bleak, Mr Bird suggests that prices could increase significantly if economic growth in the non-communist world turns out to be 4% rather than the 2% predicted by most economists.

On gold, Mr Bird says, “You have to be a psychologist to find out why people buy gold before you can make predictions.”

Anthony Bird is a consultant to many of the world’s leading aluminum companies.