GEKKO

National Review, July 28, 1997 by John Dizard

I FOUND one. The only one left. A gold bull, I mean. After the gold market's Black Monday, on July 7th, all you could hear on the gold street was the mournful sound of the margin clerks pushing their carts and calling for the investors to bring out their dead. The immediate cause was the announcement by the Reserve Bank of Australia that it had sold off most of its gold reserves in recent months, but the slide had been building for months. Any precious-metals freak with his animal spirits intact had already moved over into playing the platinum group metals, either as a straight long or in the form of a spread over gold. That meant that even many of the precious-metals optimists had taken a short position in gold, so the Reserve Bank's action was just a final boot in the face to a metal already prone in the gutter.

I still believe in Santa Claus, though, and I remembered a chart Grant Noble had sent me a couple of months ago. Grant is a commodities investor in Lake Forest, Ill., who while basing much of his work on fundamental analysis, uses price charts for his technical work that are deflated by the dollar index. He's had some good calls over the years, particularly in the grains. He had been consistently bearish on gold ever since 1993, but I thought he was a little out of it when he called for a gold bottom somewhere between $315 and $320. Guess what? That's where the bottom was plumbed on July 7th.

So I called up Grant to see where he thought the "precious" metal was going next. "I have finally turned strongly bullish on gold," he said, "and I'm talking as many of my friends into it as I can. I like the August or even the December futures contracts."

From here, Grant expects gold to struggle somewhat to get past $340. The key is the old $400-$420 resistance area, which battlefield is littered with the whitening bones of gold bulls. "Once it gets past $420, there will be no stopping gold, because then the hedge funds will decide it's a momentum play." The interesting thing about this market is its size--a tiny fraction of the equities or fixed income markets. Once momentum buyers get involved, in a market where the turnover is maybe a billion dollars day, it will be not easy to accommodate them.

* Speaking of precious metals, we're going to find out pretty soon how much of the platinum group metals the Russians will ship this year. Up to now, speculation about their 1997 shipments has been a futile exercise, since there haven't been any real shipments. Not even the bulls believe that this total drought will continue, and yet the bears, led by the Japanese trading houses, electronics companies, and automakers, have been reduced to leaking absurd stories about the supposed pressure on palladium holders such as Tiger Management to sell off their positions.

The real bull story will come out when the Russians do resume their regular shipments. Yes, some of the short positions can then be covered by the physical deliveries, but the total demand will almost certainly be goosed by the consumers' building of inventories. For as long as anyone can remember, which I think is around five years or so, it hasn't made sense to hold inventories of either platinum or palladium, since God had decreed that the price would always go down (see above story). When it turns out that the limitless supply from the Russian reserves had a limit after all, those Excel jocks in the Japanese comptrollers' departments will decide that maybe having a little extra on hand might not be a bad idea after all.

Interestingly, Engelhard, which as I recall knows something about the PGM's, is known to be going long the PGM contracts as far out as there is liquidity. Let's say they decide to take delivery. What will the locals do if the metals exchanges' warehouse stocks aren't all they should be?

* Enough about metals. I mean what good is any of this if you don't have your health? And what good is your health if you don't have a managed care provider who can pay to keep it in tune? I have been skeptical for a long time about some of the faster growing managed care providers such as Oxford Health (OXHP). I wondered if they were going to be able to keep their promises about providing premium care at a competitive price. If you talk to some "care providers" who used to have titles like doctor, you find that some of the more aggressively expanding HMO companies have hit on a foolproof means to reduce expenditures below their competitors--they're slow to pay bills.

The stock market, of course, has already intuited that a brilliant scheme like this is in operation, and has rewarded a number of these companies with the appropriately aggressive multiples.

The long-term problem is that cash flow problems like this can be elided as long as a lot of new customers are being added. When new member growth slows or stops, or when legislated care guidelines start to hit, then you want to have gotten out of these stocks--or be short them. And in case you think they can just raise their premiums to meet Wall Street's quarterly estimates, you may not have taken the state regulators into account. They have a lot of authority, not to mention whistle-blowing ability. New York's insurance department is already looking into the cash management practices of the HMO's under its jurisdiction. I wonder what they'll find? If I were long these stocks, I wouldn't wait to find out.