San Gold Corporation (SGRCF)

[bbking2003]

Mean regression rule: Without fail liquidity eventually finds its way into undervalued assets. An appropriate corollary to that rule would be that liquidity will eventually find its way out of overvalued assets.

Unless Bernanke has found a way to break the natural law of regression to the mean (he hasn’t) then at some point we are going to see liquidity flee the overvalued stock market. When it does it’s going to look for undervalued assets to land on. Nothing is more undervalued in my opinion than commodities in general and precious metals in particular.

Regression to the mean doesn’t just apply to assets stretched to the upside. It also acts to levitate extremely depressed assets, and the same rules apply. The further an asset is stretched below the mean the more violently the regression usually is once the selling exhausts. Considering that gold is now stretched about as far below the 200 day moving average as it was in 2008 the rally, when it arrives, should be every bit as powerful if not more so than we saw in 2009.