The S&P 500 has experienced extreme volatility this year as the Trump Administration has sought to fundamentally restructure global trading to eliminate trade imbalances, bring back manufacturing to the US, utilize the US buying power to address geopolitical conflicts, end fentanyl imports, end illegal immigration, pressure Brazil’s persecution of Jair Bolsonaro and so on….
Following the Trump Administration’s Liberation Day Tariff plan, the S&P 500 (SPY) dropped to 481.80 on April 7th, a 21.4% decline, from its February 19th high of 613.3. The abrupt market reversal from the SPY’s April 7th low to the market’s month end near record close of 632.08 is a 31.2% rise that was driven by the market’s changing perception of the Trump Administration’s idiosyncratic trade negotiations from a disaster to a pragmatic realignment of US military power and economic strength. The S&P 500’s 21% decline followed by the 31% rise felt whiplash inducing to most market participants. This high volatility may be signaling a new investment paradigm where historic investment trends and relationships cease to work as they are replaced by new leadership.
The New Paradigm:
With $37 trillion in US debt, large deficits, Moody’s joining S&P and Fitch in downgrading US Treasury debt, and partisan political division in Washington DC and across the country, the US dollar had its worst performance since the 1970s.
A weak dollar is typically corelated with rising gold, silver, commodity prices and inflation. Precious metals generally rise as they are perceived as both a store of value, inflation hedge, and a safe haven investment. The chart below shows inflationary and deflationary cycles since 1887. Typically, inflationary cycles follow stock market peaks as seen in 1907, 1929, 1971, 2000 and today. During those inflationary cycles, gold, oil, international and emerging markets, outperform while the S&P 500 underperforms. We observed these leadership rotations in the 1970s and the 2000 to 2009 period. We believe we are entering an inflationary environment characterized by a weaker dollar, rising precious metals, and a moderating stock market.
US Debt at Record Levels:
The US Debt Clock below shows the US National Debt at $37 trillion and a 133% debt to GDP ratio, the highest since World War II. We believe this high level of debt creates uncertainty which will boost precious metals prices and weaken US equity prices. For all the talk of US exceptionalism, the high levels of US debt and its near record debt to GDP should worry any financially sober minded investor familiar with insolvency, debt crises, and basic micro and macroeconomics.
As faith in the US weakened, the dollar traded off the first seven months of 2025. This is the worst dollar weakness since the 1970s. While this first half US$’s weakness may enjoy a bounce or rebound as trade deals are completed and uncertainty is removed from the US economy, weaker dollars often lead to strength in precious metals and other commodities. A weaker dollar may lead to inflation through more expensive imports.
Inflation from a weaker dollar should hurt the US stock and bond markets. The first seven months of the year witnessed investment leadership in precious metals, international, and emerging markets, but moderating returns in mega cap growth stocks and capitalization indices, despite month end records. We expect these trends and leadership rotation to persist.
Below is a chart of the US dollar since the 1970s.
https://www.statista.com/statistics/1404145/us-dollar-index-historical-chart
Today, the S&P 500 is trading over 21 times forward earnings of $298.87, a historically rich valuation level. Additionally, the Fed risk premium is negative again this year -0.07% as it was in January and February, before the 21% tariff tantum decline in February and March that we warned of on February 4th. The risk premium was negative 1-3% during the dot.com peak in 2000. The risk premium is negative, because the earnings yield on the S&P 500 is now less than the yield on the 10-year US Treasury. Even though several MAG 7 stocks reported strong earnings, we are cautious on the S&P 500, NASDAQ 100, and capitalization weighted indices.
It is no wonder that President Trump wants lower rates at the Fed! Unfortunately, lowering the Fed Funds rate may not lower the yield on the 10-year Treasury as recent history has shown. If, in the coming months, the Fed lowers the Fed Funds rate and the yield on the 10-year US Treasury Note rises, then the stock market could be vulnerable to a sharp selloff or worse a protracted equity market decline driven by higher long term rates. Rising long rates following a reduction in the Fed Funds Rate would signal a real investment paradigm shift.
Fed Policy Overview:
While I respect the concept of Federal Reserve independence, economist Judy Shelton makes a compelling case that the Federal Reserve, which is running at a deficit, should not be paying nearly 4.33% on close to $3.3 trillion. Alternatively, the Fed should lower the Fed Fund rate and induce banks to make more loans and lower loan costs that would stimulate the economy or allow those same banks to buy 10-year US Treasury Notes and help to lower mortgage rates. US consumers and businesses could benefit and the Federal Reserve would reduce its operating deficit, if Shelton’s analysis is correct. Shelton’s view contrasts with Fed Chairman Powell’s view and aligns with President Trump’s view.
The Chart below of the Fed Model or Risk Premium Model suggests that the S&P 500 is in the risky red zone where it was before the S&P 500’s February-April 21% decline.
The Case for Gold Miners:
Gold has had a meaningful rally, but based on historic secular or cyclical runs, we believe the price of gold could rise further. John Paulson has argued for $5,000/ounce in 2028. That is in line with forecasts by Dr. Edward Yardeni and DoubleLine CEO Jeffrey Gundlach.
We believe that the Trump administration’s global economic policies and geopolitical posture could keep uncertainty high for years. Furthermore, uncertainty could lead to further downward pressure on the dollar and support the current gold bull market for the next several years.
The strength in gold prices has led to a new bull market in gold miners, lifting the sector out of a 14 year bear market. The chart below shows that the August 1976 to January 1980 rise in gold was 525% and the July 1999 to August 2011 rise was 506%. Applying the average of those two moves, 515%, to the December 2015 low of $1060/oz implies a potential move in gold to $6519/oz.
The chart below of the VanEck Junior Gold Miner ETF (GDXJ) and the S&P 500 from November 2009 through July 2025 shows the S&P 500 up 459%and the GDXJ down 40%. We believe that the strength of gold has begun to drive higher gold miner earnings and a cyclical recovery in gold mining stocks and that these trends will persist. Furthermore, we anticipate that the outperformance of the S&P 500 to gold will revert and drive higher gold miner stock prices in the years ahead.
The chart below of the VanEck Junior Gold Miner ETF and the SPDR Gold Shares ETF (GLD) from November 2009 through July 2025, shows an 188% rise in the price of gold but a decline of 40% in the Junior Gold Miners ETF. We believe that gold mining shares and the Junior gold miner index will see a catchup rally in miner prices potentially outperforming gold’s performance before this cycle ends. Gold stocks are historically cheap, out of favor, and appear to be in the early stages of a bull market and this could lead the GDXJ price over its 2011 peak of $160/share and up from $65/share on Friday, August 1st – a 150% gain from today’s levels.
Inflationary cycle analogues suggest that gold could rise towards $5,000, if not higher in the years ahead.
Blue Lagoon Resources, Inc.
One speculative investment IGA has researched extensively and purchased millions of shares of is Blue Lagoon Resources, Inc. (BLAGF). BLAGF is transitioning from a gold resource stock to an operating gold miner. Historically, such operating transitions can lead to a 5 to 10x return, according to famed hedge fund manager John Paulson. Crescat Capital’s, geologist Quinton Hennigh, PhD., believes that BLAGF owns an alkaline sulfide quartz geology resource is similar to several of the world’s largest gold resources. Furthermore, Nicola Mining, Blue Lagoon’s ore processor, processed a 5000 ton ore stockpile in 2021 and paid the company $1.6 million. Nicola’s subsequent equity investment derisks mining prospects as it dealt first hand with Dome Mountains ore output.
35% of Blue Lagoon shares appear to be in the hands of uniquely insightful gold mining investors. Nicola Mining owns 6%, Crescat Capital Management owns 10%, Phoenix Gold Fund owns 6% and Blue Lagoon’s management and founding investors own 13% of the company shares. For further information, read our report on our website https://incomegrowthadvisors.com/does-blue-lagoons-mine-opening-signal-a-generational-wealth-opportunity/
Below is a chart of Blue Lagoon this year rising 500% before a recent 40% decline following the mine opening ceremony and the unlocking of restricted shares associated with the company’s $5 million fund raise this spring. We believe that as the company begins mining in the coming weeks and months, shares will push to new highs as revenues and cash flows are generated and the company produces 15,000 ounces of gold next year according to company guidance.
Other Rotation Beneficiaries:
International and emerging market equity funds have outperformed the major US stock indices this year, a decided change from consistent US cap weighted index leadership.
The chart below shows Foreign Stocks up 21.61% and Emerging Markets up 19.23% year to date and outperforming the S&P 500 up 9.42% and the NASDAQ up 9.71%. Whether this rotation is due to dollar weakness, or more compelling valuations of non-US equity markets, outperformance from foreign and emerging market should persist in the years ahead based on inflationary cycle analogues.
The chart below of the ratio of the CRB index to the S&P 500 index is near its lows and follows a decline since 2009 and 2011 during which cap weighted indices have been global equity market leaders. We believe that this ratio could soon turn higher as commodity prices offer new leadership as it did from 1999 to 2009. We will monitor this ratio as this could signal a paradigm shift into a commodity cycle and out of US mega cap and capitalization index leadership.
Conclusion:
Continued strength in AI, Nvidia combined with strong earnings in Microsoft and Meta suggest a 2000 like peak has not occurred. Nevertheless, performance momentum has shifted from mega cap and capitalization weighted indices to international and emerging markets for the first time in years.
Gold and gold mining stocks appear to be new leadership, supported by low valuations, strong earnings, and growing momentum. Precious metals in general are acting well and opportunities in silver and silver miners appear timely and compelling as well.
The Trump Administration has rocked the world with a new economic plan and has changed global trading relationships dramatically in the first quarters of its administration. This uncertainty, combined with our record national debt and deficits have left the US capital markets with a less hopeful view than the one of the last four decades.
We believe that rotating to new leadership will reduce market exposure and provide new sources of investment performance in the years ahead. The S&P 500 is historically rich with a negative risk premium and trades at over 21 times forward earnings. How the bond market responds to lower Fed Funds in the future will be an important sign of a potentially new and less optimistic investment paradigm.
Investment risk can be reduced in the equity markets by cutting US capitalization weighted indices exposure and allocating to foreign and emerging equity markets. Recent strength in gold and precious metals suggests we are in the midst of a bull market for precious metals and miners, and returns could be meaningfully enhanced by adding to gold, silver and precious metal mining stocks.
Based on our study of inflationary cycle analogues, we believe that we are entering a new investment paradigm, and that is reflected in the worst dollar performance since the 1970s. The one certainty we can be certain of is that markets will be volatile and investment success is based on forward looking analysis and not counting on past performance and historic trends to persist.