Natural resources deals are on the upswing.

In the second quarter, there were 142 announced deals totaling $37 billion in the oil and gas sector – that’s the highest level of M&A activity in 18 months. In the same period late year, M&A deals were worth just $14 billion.

Gold-mining deals have also been robust. Merrill Lynch-Bank of America says there were 13 transactions during the second quarter. Add that to the 15 deals in the first quarter and you have a busy market.

PricewaterhouseCoopers says the deal count in oil and gas was up 27 percent compared to the first half of 2009.

Asset sales represented 85 percent of the transactions as companies prepare for regulatory changes following BP’s Gulf of Mexico spill, PwC says. Many companies are downsizing conventional assets and replacing them with unconventional plays.

North American shale gas deals represented $13 billion of the latest quarter’s deals, nearly half coming from Asian companies looking to gain expertise in order to eventually develop shale deposits at home.

On the gold side, the $8.7 billion Newcrest Mining-Lihir Gold deal represented the first merger between senior gold producers since 2006. The bulk of the transactions were smaller companies joining forces or mid-tier producers buying early-stage companies.

Merrill Lynch-BoA calls the gold-mining sector a “buyer’s market,” saying the average deal in the second quarter was completed at a discount of 25 percent or greater. This could present a good opportunity for cash-rich producers to snatch up cheap assets.

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The following securities mentioned in the article were held by one or more of U.S. Global Investors family of funds as of June 30, 2010:  Lihir Gold.

Global markets present tremendous opportunities to those who are able to sort out what’s meaningful from the background noise. It also means asking the right questions, fine-tuning our investment processes to uncover market mispricing and other inefficiencies and moving quickly to capitalize on them. It also means going where others don’t.

The year is less than three months old but our portfolio managers’ passports are already filling up with stamps. Since the start of the year, our analysts and portfolio managers have been to 17 conferences and research trips in eight countries and six states.

This research and travel is essential because it is one of two key types of knowledge an investor must have in order to be successful: Explicit and tacit.

Explicit knowledge is academic. It is what you can learn about a company at a Bloomberg terminal by examining its balance sheet, cash flow statements, valuation against peers and other key metrics. Tacit knowledge is personal in nature and much more difficult to obtain. It is acquired over time through first-hand observation, experience and practice.

In February, co-portfolio manager of the Global Resources Fund (PSPFX) Brian Hicks and I attended the African Mining Indaba in Cape Town, South Africa. With more than 4,000 executives, ministers and individuals representing more than 800 international companies and 40 government delegations, Indaba is the world’s largest gathering of influential stakeholders and decision-makers in African mining. In 2010, sponsoring companies represented an estimated $1 trillion of market value.

I was honored to be the keynote speaker on the first day of the conference and Niall Ferguson, the world-renowned economics writer and Harvard professor, provided the keynote on the second day.

I’ve been attending this conference for over a decade and witnessed its growth from a few hundred people to several thousand today. It exemplifies the excitement and opportunity the continent has to offer.

In addition to Indaba, Brian and I visited operations in Zimbabwe, Mozambique and the city of George between Cape Town and Port Elizabeth, South Africa where it was a scorching 100-plus degrees outside. More regarding our trip is coming in the following weeks so stay tuned.

Ralph Aldis, co-manager of the World Precious Minerals Fund (UNWPX) and Gold and Precious Metals Fund (USERX), traveled to the tropical climates of Colombia and Panama to see mining efforts still in their infancy. Colombia has become a new frontier for gold mining because of its abundance of known deposits. The country’s adoption of business-friendly government policies has already triggered a boom in Colombia’s energy industry and mining may be next.

Panama might be the fastest booming country that nobody talks about and Ralph was blown away. The downtown skyline of Panama City rivals those of Dubai, Singapore and other rapidly growing cities. In Panama, Ralph stepped foot in the country’s first gold-producing mine.

Evan Smith, co-manager of PSPFX, Brian, Ralph and I attended BMO Capital Markets’ 2011 Global Metals & Mining Conference in late February. The BMO Conference, which celebrated its 20th anniversary this year, had more than 100 CEOs giving presentations and 1,200 analysts from around the world in attendance. Ralph did the investment equivalent of speed dating by holding 38 one-on-one meetings with mining executives over a three-day span—that’s more than 11 hours of meetings a day. These weren’t surface-level meetings either. Ralph’s experience and knowledge of the global mining industry allows him to get to the nitty-gritty details of how those companies are growing their reserves, production and cash flow—our three key metrics in evaluating mining companies.

On Sunday in Toronto, with frigid temperatures of 10 degrees below zero outside, I gave the keynote presentation discussing how the Love/Fear Trade is driving global demand for gold at the Prospectors & Developers Association of Canada (PDAC) Conference. This has historically been one of the pre-eminent conferences in the mining industry and this year was no different. In 2010, 22,000 participants from 118 countries attended and this year that number grew to 24,000. These analysts, consultants, investors and others come to PDAC to build relationships, share ideas and showcase their mining opportunities.

Meanwhile halfway around the world, our director of research John Derrick and Brian were surveying opportunities in Shanghai, China. The life of a globetrotter is a brutal one. After flying out early Friday morning and arriving in Shanghai at 7 p.m. local time Saturday, John and Brian only had a few hours to settle in before their day began around dawn on Sunday morning. They then spent 11 hours on a bus touring facilities and meeting with company executives around Greater Shanghai on a cold and rainy day.

Once on the ground, John and Brian heard that China’s tightening policies are having an impact but the government won’t stop until consumer price inflation (CPI) starts trending lower for a few consecutive months. Despite construction figures softening in recent months, a day of exploring all over the city unveiled the area is still booming with construction projects everywhere.

During the trip, Brian and John surveyed 12 companies ranging from miners to mobile phone makers. After some high profile blowups and instances of fraud in recent years, investors are cautious and skeptical. This means that developing our tacit knowledge by meeting companies on their home turf, listening to local investors and seeing operations firsthand becomes even more important.

That said, one thing evident from the visits is that Chinese companies are rapidly mimicking and copying U.S. business models and methods. There is still some maturation that needs to take place but it is clear Chinese companies are quick studies and are catching up with the U.S. and others very quickly.

Investors must marry the facts (explicit knowledge) with the feelings (tacit knowledge) in order to create a rich knowledge matrix. We do this by monitoring and tracking the fiscal and monetary policies of the world’s largest countries both in terms of economic stature and population. We also apply both statistical and fundamental models (explicit knowledge), including “growth at a reasonable price” (GARP), to historical and socioeconomic cycles in order to identify companies with superior growth and value metrics.

We then overlay these explicit knowledge models with the tacit knowledge obtained through first-hand observations such as the ones we’ve just discussed. Both forms of knowledge are important when it comes to investing, but it is our tacit knowledge that sets us apart from our peers, and how we strive to create alpha for our fund shareholders.

Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Foreign and emerging market investing involves special risks such as currency fluctuation and less public disclosure, as well as economic and political risk.
Because the Global Resources Fund concentrates its investments in a specific industry, the fund may be subject to greater risks and fluctuations than a portfolio representing a broader range of industries.

Gold, precious metals, and precious minerals funds may be susceptible to adverse economic, political or regulatory developments due to concentrating in a single theme. The prices of gold, precious metals, and precious minerals are subject to substantial price fluctuations over short periods of time and may be affected by unpredicted international monetary and political policies. We suggest investing no more than 5 percent to 10 percent of your portfolio in these sectors.

The Consumer Price Index (CPI) is one of the most widely recognized price measures for tracking the price of a market basket of goods and services purchased by individuals. The weights of components are based on consumer spending patterns.

Alpha is a measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a mutual fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark index is a fund's alpha.

Hollywood pirates such as Jack Sparrow and Blackbeard are glorified characters among uncivilized peers, stealing from the rich and acquiring bounties of gold. While the adventures of these 19th century caricatures are entertaining, their 21st century descendants are a growing threat to a shipping industry responsible for nearly 80 percent of the world’s trade.

Pirate attacks are on pace to set a nine-year record in 2011, according to data from the International Chamber of Commerce, which tracks global pirate attacks.

Over the past five years, the number of attempted pirate attacks around the world has nearly doubled to 445 in 2010. Pirates successfully boarded the attacked vessels in 50 percent of these attempts. It’s estimated that only 30-40 percent of attacks are reported to international agencies so these are pretty conservative figures. Currently, 750 seafarers on over 30 vessels are held hostage by pirates demanding enormous ransoms.

During that same time period, the average ransom paid to release hostages and vessels has increased dramatically. In 2010, the average ransom for hijacked ships was $5.4 million, including a record $9.5 million paid in November for a South Korean oil tanker. This is up substantially from 2005 when the average ransom paid was about $150,000, according to oil industry analyst PIRA Energy Group.

The largest problem area has been off the coast of Somalia. The country’s history of piracy extends over 20 years since the fall of its government. In an attempt to protect their waters from being overfished, Somali vigilantes began forcing fisherman in the area to pay a tax.

The area Somali pirates controlled was once only along the coast of Somalia to the Gulf of Aden. Now, following a concentrated effort by naval vessels to eradicate piracy in the area, these pirates are extending their destructive efforts to one of the most important shipping areas in the world: the Arabian Sea, Red Sea and Indian Ocean.

Their tactics have become more sophisticated. The revised scheme is to use previously hijacked vessels, called “motherships,” to transport people and supplies as far as 1,500 nautical miles from land, making it much more difficult for naval warships to patrol.

With Somali pirates covering a larger area, there’s an increased risk to energy tankers entering the Indian Ocean headed for key ports in Indonesia, India and China. In 2010, one-third of all pirate attacks were targeting ships carrying chemicals, crude oil and natural gas. This has increased from just 20 percent five years ago.

One country bearing the brunt of Somali piracy is neighboring Kenya. The Kenyan Shippers Council (KSC) estimates that piracy increases the cost of imports by $23.8 million per month, and exports by $9.8 million per month, according to One Earth Future, a global think tank on trade.

Across the continent, Nigeria’s oil industry has been a direct target of pirates. One Earth Future calculated that Nigeria’s oil production has dropped by 20 percent since 2006 as a result of piracy and other attacks. Royal Dutch Shell estimates that approximately 100,000 barrels a day (roughly 10 percent) of Nigeria’s oil production is stolen every day.

To avoid the high-risk areas and protect the workers on the ships and supplies from a pirate attack, these tankers have changed their routes. They now travel farther east toward the coast of India before heading south, adding six days of travel time for a Western destination and increasing travel expenses for the shipper. Energy tankers are also employing armed security guards, paying increased insurance rates and retrofitting their vessels to lessen the chance of a pirate attack.

One Earth Future estimates the global cost of piracy on the economy has grown to approximately $7 to $12 billion a year.

Oil transport is specifically susceptible to piracy because about one-half of total production is moved by tankers on fixed maritime routes, according to the U.S. Energy Information Administration (EIA). This oil flows through chokepoints such as the Strait of Hormuz between Oman and Iran and the Strait of Malacca between Indonesia, Malaysia and Singapore.

PIRA calculated the increased costs related to oil tankers in the table. Considering all factors—vessel diversion costs, additional bunkers, armed guards, hull insurance—the total cost is approximately 40 cents per barrel when transporting oil in and around this area.

When you consider a supertanker can transport up to 2 million barrels a day, it adds up. Under PIRA’s calculations, the piracy surcharge tacks on another $800,000 to the total shipping cost. 

Over the past 30 years, the International Maritime Organization (IMO) has successfully lowered the risk of pirate attacks in other regions around the world. With the recent escalation of piracy around Somalia, governments and worldwide organizations including the United Nations are now working in concert with the IMO to curb these attacks. Their theme for 2011, “Piracy: Orchestrating the Response,” represents an increased awareness of the world-wide political changes required to reverse this trend.