Silver Under Siege: How Chaos Shapes Mexico’s Mining Market
Blood, Silver, and State Power
Mexico is a unique place with unique people—it is a place with a failed state but a somewhat functional society with lots of interesting history. Unfortunately, when you think of Mexico you may immediately conjure up ideas of narcos holding machine guns, yellow caution tape and travel advisories. These images are justified given that it’s a place where approximately 36,000 people go missing every year.
However there’s deeper more fundamental changes occurring in Mexico that may impact you intimately—your investment portfolio. I see three main trends occurring in Mexico that are quietly creating a perfect storm (or clear skies) for silver investors.
Firstly, silver and Mexico go Mano a Mano. The Aztecs and earlier Mesoamerican cultures knew silver and used it for jewelry, ritual items and trade. This exploded during the colonial period whereby at its peak production accounted for half of the world’s silver.
Today, Mexico is the largest silver producer in the world, accounting for just shy of 25% of production annually (around 6,300 metric tonnes). They’ve held this number one production spot for 16 straight years. If we assume 6,300 metric tonnes of silver at $75/oz, Mexico’s silver production would be worth over $15 billion USD—nothing to overlook.
To highlight the age of silver in Mexico: this silver coin is 33 years older than the Dominion of Canada.
This is the “piece of eight” (real de a ocho), a silver coin minted in Mexico that became a global currency, circulating widely across Europe, the Americas, and Asia. This coin came from a now defunct Zacatecas Mint from 1834.
Silver is in the DNA in Mexico.
Leaving Soft Powder—Entering Hard Power
Secondly, a point that many people are not aware about is the fact that the Mexican narco organizations are already surrounding the mining market South of the border.
Mexican organizations will set themselves up as legitimate security or logistical support for miners as a means of extortion. Eventually, the groups gain sufficient means to become engaged in the mining business in their own right. They operate illegally with artisanal miners for mining product or at least gathering resource data for later (this has been covered extensively in Colombia).
It’s no coincidence that some of the most dangerous states in Mexico are some of the most resource rich—for avocados, corn and especially silver. Sinaloa (not listed below) is a major silver producer from the Sierra Madre Occidental, which is currently in civil war).
While mainstream media will have you think fentanyl and cocaine are their main interests—the reality is that they are motivated by the bottom line as much as Wal-Mart or Amazon. They’ve milked every sector dry to feather their own nest—now mining remains. Some estimates report collectively they are the 5th largest employer in Mexico.
State Intervention in Two Countries.
Thirdly, to say that the Mexican-American relationship is a complicated topic is an understatement—although we can simply say that there are major government actions ongoing between the countries.
United States Congressman, Senators and the Trump administration have been pushing a constant narrative of “going after the cartels” for the last 2-3 years and it’s not just for media headlines—action is being taken.
Last year, Sen. Mike Lee Bill authorized “privateers” to combat cartels outside U.S. borders. Under this “letter of marque”, we’re seeing the recruitment of nearly anybody and everybody to wage a war of asset seizure against specific criminal organization interests. “…we can still give private American citizens and their businesses a stake in the fight against these murderous foreign criminals. The Cartel Marque and Reprisal Reauthorization act will revive this historic practice to defend our shores and seize cartel assets.”—Sen. Mike Lee
Similar state action in Venezuela has also been a method of indirectly targeting Mexico. Trump capturing Maduro may have been a way to disrupt the underground markets that were so-often used by Mexican narco organizations (Venezuela was a hotbed for money-laundering for all criminal organizations—a sort of neutral criminality market).
Last week the Mexican government has made an amendment that the US Navy can freely operate on Mexican territory allegedly for “training purposes”…and yes, that includes Navy Seals. Needless to say, there is a coordinated state-effort in destabilizing the status quo, illegal or not, in Mexico.
Take a look at how Mexico’s parliament is doing following the announcement that US Drones flew over the city as they pleased (video)—Sheinbaum/AMLO and Trump administration aren’t too friendly neither.
Curiously, 93 high-level narcos have been sent to the United States since President Claudia Sheinbaum assumed office—perhaps Trump’s tariffs are working. What do 93 high-level narcos offer the US government? Information. What is the most valuable bit of information that impacts narco-operations and the Mexican government? Financial networks.
The Result: Advancing New Revenue Streams
As long as the Trump administration continues to pursue action South of the border and the Mexican government continues to crumble—this chaos is bound to directly impact revenue streams for major criminal groups.
For instance, it’s no secret that oil theft is an active source of revenue for some organizations in Mexico– some in fact are exclusively fueled, pardon the pun, by these revenues. I guarantee that the real brains of these operations are aware of the rise of the silver price and the potential new cash cow it presents for them.
If their flow of money is disrupted from illicit operations—we can speculate they’ll need to find new mechanisms to gain new revenue streams. Narco organizations will be forced to intensify further to extort existing legal operations, compete with illegal projects, and increase theft that is all antagonistic for foreign investment. No investment means production ultimately suffers—and for the largest silver producer on the planet, this has devastating effects.
Mexico’s state reserves of silver only account for roughly 6% of the global silver reserves. The spoils are much larger coming out of the Earth in a poor remote town than bribing their way into a vault likely located in London. In lawless Mexico, it’s there for the taking and remember, silver is in their DNA.
Look for narcos to squeeze blood from silver ore.
What Not to Own, Half the Battle
Executives will be quick to suggest that “I’ve never seen a better time for Mexican mining” and “silver is so hot that Mexico threats are minimal” but I believe they may be misleading investors.
Geopolitical changes shaping up between the US & Mexican governments and criminal groups are not going to be contained in a vacuum. Instead, they are going to generate a cause-effect to push criminal interests to aggressively pursue the [silver] mining industry to a greater degree. Do you want to own shares in a company where there’s a possibility your workers go “missing” at random. This risk is not properly articulated given its sensitive nature.
While most of what’s written is focused on recommending what to own; this write up can be construed to suggest what not to own—or at least, to think carefully before making the decision. This is not to say everyone operating in Mexico is under extreme risk, but you should double down on your own due diligence process before buying.
What This Means For Silver
Right now, silver is inside of a mania of volatility. Big money looking 5 years out is seeing a massive supply crunch whereas retail money are hopping between dealers for smaller bars/coins under 1000 oz. increments.
We know silver is heading for its 6th year of being in a supply deficit with no immediate changes towards equilibrium. If anything, it only takes one or two billionaires to gobble up the remainder on the COMEX. Worse (or should I say better) yet, silver is an industrial metal where it’s actively consumed with no obvious replacements.
Even if silver demand shifts to Bolivia, Colombia, Papau New Guinea, Peru or Argentina, they simply do not have the ounces to easily replace Mexico should mining production take a negative hit.
Organized crime in Mexico will bring chaos which will scare the capital required for mineral exploration, mine development and production growth.
Órale
These trends are the direct result of government intervention (or lack thereof). I hope to illustrate an element of chaos that surrounds how operations in Mexico can impact future silver supplies. I’m not trying to be alarmist—rather I’m trying to be a realist.
This is a perfect storm occurring in North America for State Speculators. US state interests wanting to “target the cartels”, existing criminal sophistication in Mexico in conjunction with silver being a culturally significant metal—lead me to believe two conclusions that can be speculated upon.
Due to the world we live in whereby government action distorts capital flows—owning Mexican silver mining stocks is inherently riskier than previously believed and that global supplies may continue to worsen more than previously expected.
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I have a position in VZLA! Not a big one but I need to think on this...