With or without the Brexit vote the drums for a return to the gold standard have been beating louder and louder for the several years.  Negative interest rates, quantitative easing, gigantic sovereign debt, and a frantic race to the bottom in global currencies have not helped quiet the crowd for more responsible monetary policies.  An economy using a commodity like gold as a currency is not the magic bullet and offers no guarantee of prosperity.  Fiat currencies are maligned because they eventually become worthless.  What makes them eventually worthless is not that they are printed on paper but rather they are mismanaged.  There is little in the way to kill the temptation for governments print more and more fiat currency.  A return to the gold standard would not pull the world economies out of stagnation.  A responsibly managed fiat currency will.

Keynes referred to gold as a ‘barbarous relic’ and he was right.  Gold works really well as a store of value and as a yardstick but it is not very good to keep an economy healthy.  First, there is a finite supply of it which immediately places a cap on a nation’s wealth.  No matter what the value of gold may be you only have what you have so the incentive is to hoard it instead of spend it.  Economies cannot flourish if there is no movement of money.  Central banks cannot be the lender of last resort if they do not have any gold to lend in times of stress.  The central banks would be picking winners and losers out due to scarcity.  If the first reaction of owners of gold or a gold-based currency is to hold it then producers must lower prices to make sales.  There would be no reason to buy something now because the price will be higher next year.  The opposite will be true.  The buyer would be better off to wait because the price will be lower in the future.  The whole world would become a zero-sum game.  Your gain would come from  someone else’s loss.

Gold and gold-based currencies have a nasty habit of leaving the country where they are minted and printed.  So even if the government makes the responsible move to create a currency that is backed dollar-for-dollar by gold and can be converted into physical bullion upon demand it could easily disappear.  It could end up in someone’s back yard or in a foreign bank.  Now the country with the economy that was capped by the fixed amount of gold in the treasury is struggling to operate because there is less of it to go around.  This encourages hoarding, deflation, and becomes a death spiral for the economy.   Again, it is hard to prosper when there is less and less currency to go around.  Gold provides a lot of stability but very little flexibility.

Detractors of fiat currencies say that all fiat currencies fail eventually.  This is true.  In the history of world most fiat currencies only last a few years.  Fraud, corruption, and political necessity lead to the devaluation of a nation’s currency.  Even privately issued currencies from pre-Civil War banks had a short life expectancy.  The detractors say that fiat currencies are intentionally devalued so the government can meet its obligations and issue even more bonds.  Good.  Can you imagine what taxes would be like when another country forecloses on the U.S.?  Detractors say that things like real estate do not really go up in value but rather the number of dollars required to buy them does because each dollar is worth a little less year after year.  Good.  What better reason to buy a house (or anything) now than wait until next year when it is higher?  Housing creates downstream economic benefits because homes need mortgages, insurance, furnishings, landscaping, paint, and much more.  If a robust, growing economy is the goal, then a fiat currency is required.  Fiat currencies work better than gold-based currencies when they are responsibly managed.  Fiat currencies are more flexible and can respond to changes in the economic landscape better than gold.  For all the negative press about the health of the US dollar, dollars still exist.  The same cannot be said for the mark, franc, peso, and lira.

There is the fear that fiat currencies will lead to inflation and history is littered with plenty of examples.  Upon closer examination inflation was usually caused by some form of central government mismanagement like losing a war, paying off high-dollar contributors, or ambitious projects that could never paid for.  Roman emperors were able to keep the amount of their coinage in check for decades.  It was only when a newly crowned emperor had to buy the loyalty of the army every few years that things got out of control and even then it took decades before Rome completely fell.  For all the heat that major banks get for taking advantage of the cheap money from the Federal Reserve they have actually been responsible and not contributed to out of control inflation.  Instead of lending out the billions they could get at dirt-cheap interest rates they simply turned around and bought Treasury bonds and earned the difference in interest rates.  True, like most government programs, it probably would have been easier and cheaper just to give the big bankers this risk-free money directly but compared to failing outright it ends up being better for the nation’s economic health.  Government mismanagement, corruption, and ambition will be the sources of the inflation not the excess of pieces of paper with holograms and watermarks.

What is the solution?  How about creating a fiat currency with a lot of gold-like features that is managed by an elite group of men whose only purpose in life is protect the integrity of this fiat currency?  The amount of the fiat currency would be initially fixed and then grow 1-2% per year to encourage borrowing and spending.  The fiat currency would be partially backed by a basket of commodities and only convertible after a 180 day cooling-off period.  This would put a damper on the commodities leaving the country since the fiat currency would only represent a fraction of the commodities.  The men who manage this fiat currency would be like the Knights Templar guarding the Holy Grail.   They would be selected after a rigorous screening and paid well so that they would not be subject to financial temptations themselves.  They would be sequestered like monks for their whole careers which would be time-limited as well.  Best of all this new fiat currency would be financed with current US dollars.  Just like after the Civil War when excess greenbacks were withdrawn from circulation by the government issuing a high-interest rate bond the same could be done today and it would only have to earn 4 to 5% to attract buyers.  Inflation is too many dollars chasing too few goods.  At any time this fiat currency could simply issue more bonds with an attractive interest rate to keep too many dollars away from too few things.

The end result would be a fiat currency that had the stability of a commodity-based currency but also had the ability to solve financial problems as they occur.  Keynes did not have a problem with loaning money to well-run banks that were temporarily in a crisis.  Keeping these banks alive and well would keep the whole financial system manageable and able to respond intelligently to stresses.  Gold is great as a measuring stick but as a financial tool it just cannot compete with nimble fiat currencies.

As an aside, be careful what you wish for.  There is evidence that the Great Depression was caused by mark-to-the-market accounting.  This meant that an otherwise sound bank could suddenly be considered troubled if the stock market, real estate, and other assets unexpectedly collapsed in price.  This recently healthy bank would be forced to sell assets at depressed prices causing further declines in the market and additional bank failures.  We obviously did not learn our lesson because there was another call recently to require mark-to-the-market accounting in banks. The Sorbanes-Oxley Act legislated for mark-to-the-market accounting and when the mortgage meltdown in 2008 occurred it had the exact same effect on otherwise strong banks.  Selling begat more selling and everyone suffered.  The people that are demanding for a return to the gold standard to save our economy could actually be planning to do more harm.  A gold standard would slow down economic activity to a crawl.  He who has the gold not only makes the rules he decides who gets his gold if ever.  So beware of the gold standard campaign.  It will stop runaway inflation but the resulting deflation will cripple the economy far worse.  Neither system of paper or gold is perfect but a well-managed fiat currency is better suited for modern times.
 
Brad Hartung is a Vice President of Investments at Ocotillo Mining Co., Inc  and the author of this blog. 
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The biggest gains in the stock market go to those who have the discipline to invest when everyone else is in panic mode.  In other words, to be a contrarian.  An old stock market adage states, “Real wealth is created by the steady accumulation of an asset when its outlook is the bleakest.”  Right now the contrarians have plenty of bleakness in commodities, especially mining stocks, and more specifically gold mining stocks.

Since reaching a peak in 2011 the price of gold has wiggled around $1100 per ounce.  Also, since 2011 most gold mining stocks are down 50-90% in price.  Mining gold became increasingly unprofitable as the costs to develop and operate mines rose and the price of gold fell.  Until recently the price of oil was a drain on profitability since it takes oil to power the trucks and other machinery to pull gold ore out of the ground and turn it into shiny coins.  Many miners were struggling to break even or just happy that they were only losing a few dollars per ounce.  The cost of closing a mine is expensive, too, so it made economic sense just to lose a little every day.

Currently, the environment for gold mining is different.  Oil is much cheaper than it was a year ago so the daily costs of exploration, development, and production is much less.  Labor is much cheaper, too, since many mining companies have cut back on employees just to stay in business which creates a surplus of miners looking for work at any wage.   Interest rates are still low and investors are hungry for yield which means some of it will find its way into mining projects.  Yet, the outlook is for gold miners is rather bleak even though there are plenty of reasons why gold mining stocks should rise in price.

Prudent investors will look to gold mining companies that generating profits during this time and make sound investments in them.  Contrarians on the other hand will seek out the companies that are losing money on every ounce and then wait for spectacular gains.  These stocks will jump the most as they move from losing money every day to breaking even to profiting as the price of gold crosses above their cost of production. This will cause all kinds of investors to pile into these stocks for no other reason than the expected rise in earnings per share.  Take a look at the chart of Harmony Gold Mining, HMY, if you need proof.  After missing expectations and reporting a loss for the quarter in November the stock price has quadrupled since then.

A mining company does not even need an operating mine to benefit from this situation.  An exploration company with decent sized project awaiting development is just as good.  Take for example Exeter Resources (XRA, $0.43).  It has a very large and very promising deposit in Chile called Caspiche.  For all the reasons listed above the pace of development seems rather slow.  In fact, it makes the birth of a baby elephant look lightning fast.  Until the last six months all gold projects were not worth the time or expense regardless of drilling results.  Today a project like Caspiche looks very attractive to everyone whether they are financiers, big cap gold miners, and, yes, contrarian investors.  But still, its chart is not screaming, “Buy! Buy! Buy!”
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The purchase of XRA stock would an asymmetrical trade.  It would have optionality.  In simpler terms the upside for the stock could be 10 to 15 times its current price and the downside would be the current price and no more.  This is the holy grail for speculators.  This optionality does not eliminate the risk of owning the stock but it does give some assurance that the worst is over.  Going back to the quote in the first paragraph the best way to play XRA is to buy shares every month, every quarter so that you will be steadily accumulating an asset when its outlook is the bleakest.  
 
Brad Hartung is writes the blog Small Cap Pirate.  You can view his stories on biotech and junior mining stocks at:  bit.ly/1Vlx0y3   

A couple times a year the biotech sector gives the retail investor the chance to look smarter than the smarter investors.  That is, the retail investor can pick up shares of a promising biotech company at a better price than what the institutional investor paid.  The institutional investor spent a lot of time and energy negotiating the deal to buy shares on very favorable terms. The retail investor merely waits for a news story to appear on Yahoo Finance and then waits a few more days to make a smart buy.

The event the retail investor should look for is an offering of additional shares to investors.  It can go by many names like registered direct offering or private placement but the concept is the same.  Shares are offered to institutional and accredited investors at discounted prices and usually with other favorable terms like warrants.  The money raised is used to fund drug testing (or in the case of a mining company, the building of a mine.)  In just about every other industry this would be considered a negative because the company has run out of money and needs to dilute its shares to stay in business.   In the biotech sector it means the chance to live another day and generate some positive Phase II or III news which will move the stock price higher.

Plus, in nearly every case of a biotech company that completes a direct offering the share price often dips 10-15% within a week of the placement.  This means that the retail investor can pick up the shares of the same company at a better price than big investors.  Think about it for a moment.  Without conducting any research other than a scan of Yahoo Finance news and without gut-wrenching negotiations the retail investor can buy shares at a lower price with just a few clicks on the computer.  No secret handshakes, no MBAs, no insider connections.

The most recent example of this is with Northwest Bio (NWBO, $2.31) who completed a direct offering on December 24, 2016.  The company was out of money and needed cash to fund Phase II tests for its cancer drugs.  As you can imagine, investors negotiated a sweetheart deal to buy shares at $3.60 share and get some warrants in the process.  If this does not seem impressive consider that NWBO was a $12 stock less than nine months ago.  And like clockwork, as soon as the direct offering closed the stock has moved even lower to its current price of $2.23.  The retail investor can now get as much stock as they want in the public market for about 2/3 of what the institutions paid.
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Why this happens is a mystery but it happens enough that the retail investor can piggy back on the well-researched ideas of well financed investors.  Without a lot of effort anyone can now be a speculator in biotech even if they have no education or experience in medicine or science.  This phenomenon happens in the gold and silver mining sector, too, but with the vicious bear market in commodities it could take years before you see any gains.

If there ever was a time to buy “at the sound of the cannons” it is now with biotech company that is searching for a solution of keeping the patient alive and healthy while undergoing chemotherapy.  The market reacted to the poor Phase III results in December with a dramatic sell-off.  Most investors would be scared away from a stock that lost 70% its value in one day but the savvy speculators see the “blood in the streets” and recognize that now is the time to buy.
Chimerix, Inc. (CMRX, $8.94) is in the business for finding treatments for immunocompromised patients.  These patients have had their ability to fight off infections and viruses weakened by chemotherapy, bone marrow transplants, and other treatments.  What good is it to kill the cancer if the patient later dies of an infection?  This is what CMRX is trying to prevent.  And it will also be the key to CMRX’s success in the future.  To make huge gains with a biotech stock it has to serve a large market.  Cancer, heart disease, diabetes and so on are large markets and when a company creates a medication to combat those diseases the result is a huge jump in the stock price because millions of people will need and want that drug.
CMRX takes a little different approach to having a large market by making treatments like chemotherapy, bone marrow transplants, and kidney transplants more effective.  So by combining many small markets like the ones mentioned above and including ones like smallpox CMRX can provide its products on a large market scale.  For investors, the disappointing Phase III results and the resulting drop in share price are actually a good thing.  The phrase “we learn more from our mistakes than our successes” is never truer.  Before CMRX really did not know how effective their medications were. Now the scientists and doctors at CMRX can pour over the data and discover what they need to do ensure their next Phase III test will be successful.  Now they know what does not work and can focus on doing more of the right things.
Plus, the sell-off took a lot of risk out of owning CMRX.  Can you imagine owning the stock at $55 and worrying every night about what will happen when the Phase III results are published?  Now that the uncertainty has been exposed and the share price has been adjusted making it much more of a bargain than a few months ago.  The biotech sector is loaded with stories of companies failing their first Phase III test only to regroup, reorganize, and go on to greater things in the future.  Just take a look at OHRP.  It, too, lost over 70% of its value in one day in March 2015 and has nearly tripled in price since then.
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Ohr Pharmaceutical (OHRP) is a beautiful example of how to speculate in biotechnology stocks.  In the past year it has given at least three different buy signals and each one would have yielded a respectable profit within a few months time.  More importantly had you invested in OHRP your principal would have been fairly safe from volatility meaning you could sleep easier at night.

OHRP suffered a huge one-day drop of 60% earlier this year in March when one of its tests delivered disappointing results.  There are plenty of websites touting the fantastic  upside of investing in biotech stocks prior to their Phase III results.  But more often than not the money is made if you happen to be short the stock.  Most Phase III results are negative and only the short-sellers make any money.

Rather than shy away from volatile small cap biotech stocks you should use this history to make an intelligent speculation.  OHRP's drop fit perfectly into one of my favorite rules of thumb when it comes to speculating, "Wait one week after a giant one-day drop then buy."  If you had done this with OHRP back in April of 2015 you would have more than doubled your money by now.

Why this works is more of a study in human behavior than fundamental or technical analysis.  It is probably more a function of the biotech company convincing investors what it learned from the Phase III test failure and getting them to put up more money for another test, another successful test.  Plus, all the weak holders of the shares were flushed out when the price collapsed so any remaining investors are in it for the long run.

In many ways OHRP is an overlooked biotech stock.  It is not looking for a cure to cancer or diabetes (both huge markets) but rather macular degeneration.  As the population ages, then this will become a bigger and bigger market.,  But for now it is just a niche player.

What is the next OHRP?  Check out THLD.  It took a big drop a few weeks ago and you can pick it up at a great price.

S"ometimes I think that all the good things in life are reserved for the cool kids, the in-crowd, the secret handshake club.  When it comes to investing whether in real estate, private equity, or stock market it appears that only few well-heeled investors get all the good recommendations and the rest of us are left trying to figure which of the scraps will make the most money for us.

Actually, there is a way to piggy back on the picks of these high-net worth investors.  The magic word is "private placement."  In a private placement a company offers its shares to selected, accredited investors at below market prices.   The company raises money for its ventures and the investors get shares inn an up-and-coming company.

For some reason and I do not know why as soon as the private placement is complete and the news published the shares take a dip in price.  It is only five or ten cents per share and it only lasts for a few days but the price almost always has a temporary decline.  So, now the average retail investor can step in and pick up the exact same shares from the exact same company at a lower price than the white shoe, country club millionaires.  Think about it, you can get a better deal without having to know the secret handshake or disclose your net worth or income.

Plus, this also follows another rule of speculation.  "He who raises the most money wins."
Whether you are looking for gold or a cure for cancer you need money to make it happen.  If you cannot develop the mine or perform testing your company is going nowhere.  So it stands to reason that the companies that can convince investors to trust them with their money will be around a lot longer than those that cannot.  So this makes the private placement an even better indicator for speculators.

Yes, the biotech sector is way overheated but there are still a few nuggets worth investing in like GERN.

When speculating in biotech stocks it helps to have company with a drug that will cure a huge market.  Cancer, diabetes, and heart disease are all huge markets where billions of dollars are spent on drugs trying to cure them.  So when a new drug comes out for one of these diseases there is a lot of excitement  about the future of drug for that stock.  The future revenue streams in one year can exceed the stock current market cap which sends the price soaring.  Plus, this kind of income can make the stock attractive to larger, big-pharma companies which look to acquire these tiny biotech companies at huge premiums.

This is the case with GERN which I bought last week.  It has been moving slowly higher since then which is a good sign.  Anytime you make a speculation and it immediately moves in a profitable direction, no matter how small, is usually a good sign that you have made the right choice at the right time.

I picked up shares of PALAF ten days ago.  While it looked like a good speculation it also had a nice track record behind.  Two legends, Rick Rule and Doug Casey,  in mining stocks made a lot of money on PALAF years ago when there was a boom in uranium.  I think there will be another boom in uranium and well-run companies like PALAF will do the best.

Why?  Many countries like China and Japan are ramping up their nuclear power plants and building new ones.  The surplus of uranium that Russia had been selling should be gone by now.  And the spot price for uranium is at a very low level which has discouraged mine development.  So with an increase in demand and low supply the price for uranium will jump high enough to make mining profitable again.

This is not the first story about the rosy future for uranium but PALAF is one of only a few stocks in a decent uptrend and that is why I bought it.  You can buy it for about the same price as I did so the opportunity is still there.

I bought shares of GPL a few days ago.  I am not a gold bug or silver stacker but I thought it would be a good speculative investment.  You can get it for the same price as I did. 

GPL meet all my criteria to be a buy.  It had the price action I look for on a chart and it gave the same buy signal on a short term chart as it did on the long term chart so I feel confident about its future. 

There is some fundamental analysis that is working in its favor, too.  Plus, there is rumor about an acquisition from a larger firm.  Basically, all commodities are down in price this year and the shares of the companies that mine them are at 5 and 10 year lows.  There will be an event that will send the price of these commodities higher.  When?  I do not know.  How high?  I do not know.  But I do know that silver is the most volatile of these commodities and silver mining companies are highly leveraged to the price of silver.  So a 30% increase in the price of silver could mean a 300%+ increase in the price of the shares.  That is what I am counting on. 

It could take another year to see the results but that is why I only take a small position to start and then add to it as it moves in my favor.

I sold my AVXL shares yesterday.  I made 6x my money in about 2 years, most of it in the last 3 months.  There is a big announcement on Nov. 5 about their latest drug.  Regardless of the news I think the stock will sell-off and then I can buy more shares later at a lower price if I still think it is a good speculation.