Investors See Far Out Profits in Psychedelic Medicine

It’s been a long strange trip for Brom Rector to become one of the few venture capitalists investing exclusively in psychedelic medicine. The 31-year-old has been experimenting with drugs like LSD for a decade but he never imagined he could turn that interest into a career.

Now Mr. Rector, a former hedge-fund portfolio manager, is raising millions of dollars from scientists, financiers and crypto bros eager to buy into treatments that aren’t even legal yet. They are betting that hallucinogens will eventually be approved for medical treatment and recreational use, spurring a boom from biotech to the entertainment industry that will far outstrip the fitful growth of legal cannabis.

Mr. Rector burned out from his job as a quantitative researcher for Los Angeles-based Crabel Capital Management in December 2020 and launched a podcast a few months later to delve into the budding psychedelics market. Listeners began asking him for investment ideas, prompting him to open his VC firm—Empath Ventures—in the fall.

Empath has since raised US$2.1 million of a $10 million target for its first fund and made 10 investments. Portfolio companies include Mindstate Design Labs, which develops new psychedelics, and Wavepaths, a company that designs smart music software to help therapists steer clients’ trips. The firm is one of a small but growing cadre of investors, including JLS Fund and billionaire Peter Thiel, taking interest in psychedelics.

Psychedelics are making the jump from party drugs to prescription drugs because some clinical research shows they are effective at treating conditions like depression, post traumatic stress disorder and addictions. Investors are also backing research and development in new drugs with other applications, like treating traumatic brain injuries. Much of how psychedelics affect the brain is unknown and critics worry about potential long-term damage or psychosis from excessive use.

The Food and Drug Administration approved the use of a drug similar to ketamine for treatment-resistant depression several years ago, and is expected to rule on an application for MDMA-assisted therapy in 2023. MDMA is more commonly known as the main ingredient in Ecstasy. Psilocybin, the hallucinogenic compound in mushrooms, could also see action from the FDA in the next few years.

The Wall Street Journal spoke to Mr. Rector about his return targets, legalization and convincing his mom to trip.

What are the returns you are looking for in your investments?

It’s just like a traditional biotech play. There’s a high probability of failure and potential upside of 10, 20, maybe 50 times.

I also invest in the infrastructure and accessories around psychedelics. The clinics where the stuff is delivered, the companies that make software to support the clinics. A lot of those businesses are not going to have that 50 times potential but they have a lot higher probability of becoming cash flow positive.

When most people think of psychedelic therapy they think magic mushrooms, maybe ayahuasca, both of which grow in nature. What about man-made drugs?

The final frontier is the exciting world of novel psychedelic molecules. It blows my mind that LSD was invented in 1938—before computers. We have all these amazing tools at our disposal now, and we’re entering a time where it’s culturally acceptable to apply those tools to the discovery of new psychedelic drugs.

LSD is amazing, as are classic cars from the 1930s. The Tesla Model S of psychedelics is yet to be created.

What is socially acceptable psychedelic use in the industry? Do you trip with your investors?

I’ve had a lot of people tell me that if I want to raise capital I should just start passing out psychedelics to my investors. I think there’s a moral issue with that. No, I have not tripped with my investors and I don’t plan on tripping with any of my investors. I haven’t tripped with any of my portfolio companies either.

There are some other investment groups out there that do not have the same answer that I just gave you. I know that it happens.

Are there medical applications of psychedelics other than mental health coming down the road?

Mental-health indications and addiction treatment will likely be the dominant applications of psychedelic medicine in the short term.

That said, psychedelics are really good at inducing neuroplasticity and reducing inflammation, so it makes sense to research them as treatments for any indication that could theoretically benefit from either of those things.

There are in-progress Phase 1 trials of psychedelics as treatment for ischemic stroke, alzheimers and TBI [traumatic brain injury]. I also know someone who personally used psychedelics as part of a treatment program to regain cognitive and motor function after suffering a severe TBI. It’s too early to say for sure, but it seems like there might be something there.

Why are cryptocurrency traders now investing in psychedelics companies?

To really get into crypto you have to be a big believer in crazy bold new ideas. Psychedelics is similar to crypto in the sense that it is a crazy big sort of bold new investment thing.

But, I think that the underlying technology and application of psychedelics is much more proven than that of crypto. In crypto the upside is enormous because it doesn’t seem like anyone is actually policing it in these exchanges. I think in the long run the upside of psychedelics is more similar to the upside of any other sort of revolutionary biotech play.

What about recreational use of psychedelics? Is that also coming?

One of the things I emphasize in my pitch deck for investors is that I want to invest in companies that are not threatened by de-regulated recreational-use regimes because I think they are inevitable. In the long run, I think we’ll see a few states that will have fully recreationally legal psychedelics

When you look at what Oregon is doing [decriminalized psilocybin and legalized therapeutic use] they’re being very open minded about the use of psychedelics. It wouldn’t surprise me to see concerts or other events there in the future where everyone gets a low dose of psilocybin to make the colors brighter and the music sound better.

Are there any potential risks in wider recreational use, among young people?

The more that users are educated on the importance of “set and setting” [mindset and environment] and know about potential interactions of psychedelics with other drugs and other contraindications, the better outcomes will be. When things become legal, the stigma around them lifts, and it becomes easier to share this information openly—so I think that recreational legalization would actually be a harm-reduction method.

I hope the industry ends up being proactive and responsible with its messaging. There is still stigma around the use of psychedelics and a single, high-profile case of a bad trip could rob the industry of a lot of social credibility, even though many people die from socially acceptable drugs like alcohol and cigarettes each day.

Could there be a political backlash against liberalizing use of psychedelics?

Conservatives are much more open minded about psychedelics than you might think because of the narrative of psychedelics treating PTSD. Who gets PTSD a lot? It’s veterans. [Former Texas Gov.] Rick Perry has gone on the record saying Texas should fund studies on it.

Psychedelics are gaining ground all over the place even amongst the midwestern housewife subsegment of the population.

And you mentioned your mom has tried them?

My mom, who never really did any sort of substance or alcohol consumption, ended up deciding that she wanted to try it. As I started the fund she started paying more attention to it and read all the articles she could find about it, including the one in Good Housekeeping.

You hear enough experiences from people that are in your own demographic and soon enough you’re like “Maybe I should try it. It’s not just for those weird hippies after all. It’s for me too.”

Give gold bugs their due. The yellow metal has been a light in the investing darkness. At a recent $3,406 per troy ounce, it’s up 30% this year, to the envy of stock, bond, and Bitcoin holders. Cash-flow purists will call this a flash in the pan, but they should look again. Over the past 20 years, SPDR Gold Shares , an exchange-traded fund, has surged 630%—85 points more than SPDR S&P 500 , which tracks shares of the biggest U.S. companies.

That isn’t supposed to happen. If businesses couldn’t be expected to outperform an unthinking metal over decades, shareholders would demand that they cease operations and hoard bullion instead. So, what’s going on? If this were gasoline or Nike shoes or Nvidia chips, we would look to supply versus demand. With immutable gold, nearly every ounce that has ever been found is still around somewhere, so price action is mostly about demand. That has been ravenous and broad since 2022.

That year, the U.S. and dozens of allies placed sweeping sanctions on Russia, including its largest banks, and China went on a bullion spree. Its buying has since cooled, but other central banks have stepped in. Perhaps this is unsurprising, in light of a decades-long diversification by finance ministers away from the U.S. dollar, which is down to 57% of foreign reserves from over 70% in 2000. But the recent uptick in gold stockpiling looks to JPMorgan Chase , the world’s largest bullion dealer, like a debasement trade. Investors are nervous about President Donald Trump’s tariffs, his browbeating of the Federal Reserve Chairman over interest rates, and blowout U.S. deficits.

Surging Demand

It isn’t just bankers. Demand among individuals for gold bars and coins has been surging, with some dealers experiencing sporadic shortages. Gold ETFs were bucking the trend, but flows there have turned solidly positive since last summer, including recently in China. All told, there is now an estimated $4 trillion worth of gold held by central banks, and $5 trillion by private investors. Calculated against $260 trillion for all financial assets, including stocks, bonds, cash, and alternatives, that works out to a global gold portfolio allocation of 3.5%, a record.

What’s next? BofA Securities says that central banks have room for much more gold buying, and that China’s insurance companies are likely to dabble, too. RBC Capital Markets analyst Chris Louney says ETFs could drive demand growth from here, especially if angst reigns. “Gold is that asset of last resort…the part of the investing universe that investors really look for when they have a lot of questions elsewhere,” he says.

Russ Koesterich, a portfolio manager for BlackRock , a major player in ETFs including the iShares Gold Trust , says that gold has proven itself as a store of value, and deserves a 2% to 4% weighting for most investors. “I think it’s a tough call to say, ‘Would you chase it here?’ ” he says. “There have been some pullbacks. Those might represent a good opportunity, particularly for people who don’t have any exposure.”

Daniel Major, who covers materials stocks for UBS , points out that gold miners mostly haven’t wrapped themselves in glory in recent years with their dealmaking and asset management. As a result, a major index for the group is trading 30% below pre-Covid levels relative to earnings. UBS increased its 2026 gold price target by 23%, to $3,500 per troy ounce, before gold’s latest lurch higher. Many miners are producing at a cost of $1,200 to $2,000. Major has bumped up earnings estimates across his coverage. “I think we’re gonna see further upward revisions to consensus earnings,” he says. “This is what’s attractive about the gold space right now.”

Major’s favorite gold stocks are Barrick Gold , Newmont , and Endeavour Mining . More on those in a moment. We also have thoughts on how not to buy gold—and what not to expect it to do: Don’t count on it to keep beating stocks long term, or to provide precise short-term protection from inflation spikes and stock swoons. But first, a little history, chemistry, and rules of the yellow brick road.

Flesh of the Gods

The first gold coins of reliable weight and purity featured a lion and bull stamped on the face, and were minted at the order of King Croesus of Lydia, in modern-day Turkey, around 550 B.C. But by then, gold had been used as a show of riches for thousands of years. Ancient Egyptians called gold the flesh of the gods, and laid the boy King Tutankhamen to rest in a gold coffin weighing 243 pounds. The Old Testament says that under King Solomon, gold in Jerusalem was as common as stone. Allow for literary license; silicon, an element in most stones, is 28.2% of the Earth’s crust, whereas gold is 0.0000004%.

Marco Polo described palace walls in China covered with gold. Mansa Musa I of Mali in West Africa, on a pilgrimage to Mecca in 1324, is said to have splashed so much gold around Cairo on the way that he crashed the local price by 20%, and it took 12 years to recover. To Montezuma, the Aztec king whose gold lured Cortés from Spain, the metal was called, as it still is by some in Central Mexico, teocuitlatl —literally, god excrement. Golden eras, gold medals, the Golden Rule, and golden calf—so deep is the historical association between gold and wealth, excellence, and vice that it seems to have a mystical hold on humanity. In fact, it’s more a matter of chemical inevitability.

Trade and savings are easier with money. Pick one for the job from the 118 known elements. Years ago on National Public Radio, Columbia University chemist Sanat Kumar used a process of elimination. Best to avoid elements that are cumbersome gases or liquids at room temperature. Stay away from the highly reactive columns I and II on the periodic table—we can’t have lithium ducats bursting into flame. Money should be rare, unlike zinc, which pennies are made from, but not too rare, unlike iridium, used for aircraft spark plugs. It shouldn’t be poisonous like arsenic or radioactive like radium—that rules out more elements than you might think. Of the handful that are left, eliminate any that weren’t discovered until recent centuries, or whose melting points were too high for early furnaces.

That leaves silver and gold. Silver tarnishes, but rarer, noble gold holds its luster. It is malleable enough to pound into sheets so thin that light will shine through. And, despite the best efforts of Isaac Newton and other would-be alchemists, it cannot be artificially created—profitably, anyhow. Technically, there is something called nuclear transmutation. If you can free a proton from mercury’s nucleus or insert one into platinum’s, you’ll end up with a nucleus with 79 protons, and that’s gold. Scientists did just that more than 80 years ago using mercury and a particle accelerator. But what little gold they produced was radioactive. If you think you can do better, you’ll likely need a nuclear reactor to prove it, but a large gold mine is one-fifth the cost, and we have to believe the permitting is easier.

We passed over copper due to commonness, but it has become too valuable to use for pennies. The 95% copper content of a pre-1982 penny is worth about three cents today. The equivalent amount of silver goes for $3.10, and gold, more than $320. But the three trade in different units. A pound of copper is up 17% this year, at $4.72. Silver and gold are typically quoted per troy ounce, a measure of hazy origin and clear tediousness, which is 9.7% heavier than a regular ounce. A troy ounce of silver is $32.70, up 13% this year.

Some Finer Points

Confused? This won’t help: The purity of investment gold, called its fineness, is measured in either parts per thousand or on a 24-point karat scale. A karat is different from a carat, the gemstone weight, but our friends in the U.K.—who adopted troy ounces in the 15th century—often spell both words with a “c.” Gold bricks like the ones central banks swap are called Good Delivery bars, and weigh 400 troy ounces, give or take, worth more than $1.3 million. If you buy a few, lift with your legs; each weighs a little over 27 regular pounds (as opposed to troy pounds, which, it pains us to note, are 12 troy ounces, not 16).

There are many options for smaller players, like Canadian Maple Leaf coins, which are 24-karat gold; South African Krugerrands, at 22 karats, and alloyed with copper for durability; and Gold American Eagles, 22 karats, with some silver and copper. Proof coins cost extra for their high polish, artistry, and limited runs, and may or may not become collectibles. Humbler-looking bullion coins are bought for their metal value. Prefer the latter if you aren’t a coin hobbyist. Avoid infomercials and stick with high-volume dealers. Even so, markups of 2% to 4% are common. Costco Wholesale , which sells gold in single troy ounce Swiss bars, charges 2%, but often runs out, and limits purchases to two bars per member a day. Factor in the cost of storage and insurance, too.

ETFs are more economical. For example, iShares Gold Trust costs 0.25%, not counting commissions. For long-term holders, as opposed to traders, there is a smaller fund called iShares Gold Trust Micro , which costs 0.09%.

Resist fleeing stocks for gold. The surprisingly long outperformance of gold is mostly a function of its recent run-up. From 1975 through last year, gold turned $1 invested into about $16, versus $348 for U.S. stocks. That starting point has a legal basis. President Franklin Roosevelt largely outlawed private gold ownership in 1933; President Richard Nixon delinked the dollar from gold in 1971; and President Gerald Ford made private ownership legal again at the end of 1974.

Gold has been a so-so inflation hedge over the past half-century, and at times a disappointing one. In 2022, when U.S. inflation peaked at a 40-year high of over 9%, the gold price went nowhere. The problem is that high inflation can prompt a sharp increase in interest rates. “If people can clip a 5% coupon on a T-bill, often they’d prefer to do that than have either a lump of metal or an ETF that doesn’t produce cash flow,” says BlackRock’s Koesterich.

Likewise, while gold has generally offset stock declines this year, it hasn’t always done so in the heat of the moment. Recall tariff “liberation day” early this month, which sent U.S. stocks down close to 11% in three days and pulled gold down nearly 5%. “This isn’t an uncommon scenario,” says RBC’s Louney. “When investors were losing elsewhere in their portfolio, gold was sold as well to cover those losses.”

Our top tip on how gold behaves is this: It doesn’t. People do the behaving, and they are appallingly unreliable. Use bonds as a stock market hedge. If they don’t work, fall back to patience. For inflation protection, think of assets that are a better match than gold for the goods and services that you buy every week. A diversified commodities fund has precious metals but also industrial ones, along with energy and grains. Treasury inflation-protected securities are explicitly linked to the consumer price index, which measures inflation for a theoretical individual whose buying patterns differ from your own, but are close enough.

Own a house. Stick with a workaday, reliable car. Yes, cars deteriorate. But so does nearly everything on a long enough timeline. Rely mostly on stocks, which represent businesses, which wouldn’t endure if they couldn’t turn raw inputs like commodities into something more profitable. There’s even a miner, Newmont, in the S&P 500.

The Case for Mining Stocks

Speaking of which, UBS’ Major recently upgraded both Canada’s Barrick and Denver-based Newmont from Neutral to Buy. “Both very much fall into that category of having a challenging recent track record,” he says. Newmont has lost 20% over the past three years while gold has gained 76%, which Major blames on difficult acquisitions and earnings shortfalls. Barrick, down 8%, has been in a dispute with Mali since 2023, when its government instituted a new mining code that gives it a greater share of profits. In recent days, authorities have shut the company’s offices in the capital city of Bamako over alleged nonpayment of taxes.

These are the sort of headaches that Krugerrands in a safe don’t produce. But Major calls expectations “adequately reset,” free cash flow attractive, and guidance achievable. Newmont, at 13 times next year’s earnings consensus, is selling assets, and Barrick, at 10 times, has healthy production growth.

Major also likes London-based, Toronto-listed Endeavour Mining , up 40% over the past three years and trading at nine times earnings, although he says it has “higher jurisdictional risk.” It is focused on West Africa, especially Burkina Faso, which had a coup d’état in 2022. You’d think the stock would be doing worse amid such political upheaval. Then again, Burkina Faso since 1966 has had eight coups, five coup attempts, and one street ousting of a president who tried to change the constitution to remain in power. That works out to an uprising every four years, on average.

Montezuma’s scatological name for gold might have been prescient, considering the sometimes-odious consequences for small countries that find it.