President Trump has announced new tariffs—on Mexican goods this time—to try to force Mexico to do more to stop the flow of illegal immigration into the US. Wall Street dropped sharply on the news—and gold did its job.

 

Chart Gold vs Stocks, May 31, 2019

 

Whether or not one agrees with the appropriateness of Trump’s action, it’s part of a trend that now seems very likely to increase fear in the global economy in the months ahead. The chart above makes the investment implications obvious.

Got gold?

On the flip side, industrial minerals are mostly down today. Silver, which is both precious and industrial, is underperforming gold. This all makes sense and is very bullish for my gold stocks—hopefully yours as well.

What’s less obvious is how this new volley in the trade war will likely affect foreign companies working in Mexico, including some Canadian miners.

Few of these miners produce in Mexico specifically for export to the US. That’s not what I’m worried about.

What does concern me is that while the average Mexican does understand that the US and Canada are different countries, they tend to feel the same way about all gringos. Trump’s action is sure to stir up anti-gringo sentiment. This will make it harder for any gringo company to gain and maintain social approval for their activities. That in turn undermines permitting, labor relations, and a whole raft of important issues.

To make matters worse, Mexico’s populist president, Andrés Manuel López Obrador (AMLO) would not survive being seen as weak on this issue. US immigration is an important issue for all Mexicans, and an especially sensitive one for AMLO’s support base. He simply cannot be seen to cave on this.

This could get very ugly before it’s resolved.

What to do?

I’m not saying I’d bail on all Mexico plays. I reduced my exposure last year, in large part because of AMLO’s presidency. I’m happy to hold what I have now, which doesn’t hinge on new permits.

But if I did own stock in a company that needs drill permits, construction permits, exploitation permits, or any other vital green light from government, I’d have to think about getting out while the getting is good.

Serious political setbacks always trump even the most exciting, value-adding results on the ground. I’ve learned that it’s usually better to step out of harm’s way and buy back in when the coast is clear. Given all that’s going on, it’s possible that stocks in Mexican gold and silver plays could tank on bad news, even as precious metals prices rise.

I want to stress that I’m not predicting bad news for all Mexico plays. But I am warning you of elevated risk, especially for companies in need of permits.

 

Investors are worried about Trump’s new tariffs on Mexican goods, but it’s Canadian miners that could suffer major collateral damage.

Caveat emptor,

Lobo Tiggre Signature

Friday, May 31, 1:45pm, EDT, 2019