China’s Premier Wen Jaibo is keeping the country on an light monetary stance while maintaining an active fiscal policy. The statements turned investors positive on China and reinforced the belief that the juggernaut will continue to be a major consumer of metals, reports Michael Taylor and Rebekah Curtis for Reuters. [A Guide to Metals ETFs.]

China is just one part of the base metals equation, albeit a large one. Let’s take a look at the big picture:

Nickel. The slump in nickel prices has been supplanted by stronger demand and low stock prices since the lows of last March. Price and volume recovery will depend upon patterns changing in both supply and demand in various parts of the world, says Metal Miner. Actual nickel production may  fall behind demand as the stainless steel industry increases usage, reports Anna Stabum for BusinessWeek. [What Influences Metals Prices?]

• iPath DJ AIG Nickel ETN (NYSEArca: JJN)

Aluminum. Overall, the outlook for aluminum is improving, as prices and demand have both waned. The Australian on The Wall Street Journal reports aluminum prices are 55% higher than they were last year at this time.

• iPath DJ-AIG Aluminum ETN (NYSEArca: JJU)

Copper. Copper scrap is now selling at all-time highs as high-grade electrolytic copper wire scrap, which feeds about 40% of world smelters of the metal, tends to become scarce as the Snowpocalypse delays collection, reports Anna Stabum for BusinessWeek.

Chile’s earthquake and numerous aftershocks could keep copper prices higher if transportation and production disruptions continue to be issues.

• iPath DJ-UBS AIG Copper ETN (NYSEArca: JJC)

For more stories about metals, visit our metals and mining category.

An increasing federal deficit coupled with a large decline in the U.S. dollar may eventually translate into rapid inflation and higher metal prices, while the dollar’s recent strength and higher interest rates could mean that precious metals will drop in value, comments Jonathan Bernstein for ETFZone. [Hedge Inflation With These ETFs.]

That’s why investors need to be prepared to act accordingly. Not all metals have a similar reaction to shifting market conditions.

ETFs offer exposure to precious metals such as gold, silver, platinum and palladium, and base metals like copper, nickel and lead. Precious metals are lightly counter-cyclical, affected by interest rates and the dollar, while base metals are highly cyclical, performing well in a strong economy. [4 Factors Influencing Metals ETFs.]

Commodity ETFs come in a variety of incarnations; which you choose is up to you. It depends on the kind of exposure you want, what kind of risk you’re willing to endure and taxes you’re willing to deal with.

Funds can be physically backed by the metal itself, it can have ownership of futures contracts to buy the metal, it can hold companies involved in the mining and production of a metal. [Copper ETN: Forging Ahead?]

A fund that is backed by the physical commodity has the metal stored in a vault. Investors should note that these funds have storage fees calculated into their expense ratios. Also, physical bullion trades are taxed by the IRS at the collectibles rate of 28% instead of the long-term equity rate of 15%. Investors should still consult their tax experts for specific advice, though. [What's Driving Platinum and Palladium ETFs?]

• SPDR Gold Shares (NYSEArca: GLD)
• iShares COMEX Gold Trust (NYSEArca: IAU)
• iShares Silver Trust (NYSEArca: SLV)
• ETFS Physical Gold (NYSEArca: SGOL)
• ETFS Physical Silver (NYSEArca: SIVR)
  
• ETFS Physical Platinum Shares (NYSEArca: PPLT)
• ETFS Physical Palladium Shares (NYSEArca: PALL)

Funds may also own futures contracts to buy the metal. Contracts are rolled over before expiration, and another contract is purchased in its place. Rolling over contracts generates trading fees. Futures contracts are taxed at a lower maximum rate of 23%.

• PowerShares DB Precious Metals Fund ETF (NYSEArca: DBP)
• PowerShares DB Base Metals Fund ETF (NYSEArca: DBB)
• PowerShares DB Gold Fund ETF (NYSEArca: DGL)
• PowerShares DB Silver Fund ETF (NYSEArca: DBS)
• Ultra Gold ETF (NYSEArca: UGL)
  
• ProShares UltraShort Gold (NYSEArca: GLL)
• ProShares Ultra Silver (NYSEArca: AGQ)
• ProShares UltraShort Silver (NYSEArca: ZSL)

Many metals ETFs give investors exposure to the companies that mine and produce the metals. While such funds don’t give you access to spot prices, they have their own advantages. One big one is that mining companies can continue to do well if a commodity’s price steps back, but remains far above the cost of production. Such funds also lack the big day-to-day swings that have a tendency to vex futures- and physically-backed metals ETFs.

• SPDR S&P Metals & Mining (NYSEArca: XME)
• Market Vectors Gold Miners (NYSEArca: GDX)
• Market Vectors Junior Gold Miners (NYSEArca: GDXJ)
• EGS DJ Emerging Markets Metals & Mining Titans (NYSEArca: EMT)

Lastly, funds may offer exposure through notes or exchange traded notes (ETNs). ETNs are taxed by the long-term equity rate of 15%. ETNs are unsecured debt backed by the full faith and credit of the issuer. They have no tracking error. [ETNs: Everything You Want to Know.]

• ELEMENTS Rogers International Commodity Metal ETN (NYSEArca: RJZ)
• E-TRACS UBS Bloomberg CMCI Industrial Metals ETN (NYSEArca: UBM)
• iPath DJ AIG Industrial Metals ETN (NYSEArca: JJM)
• PowerShares DB Base Metals Long ETN (NYSEArca: BDG)
• iPath AIG Copper (NYSEArca: JJC)
• iPath DJ AIG Lead (NYSEArca: LD)
• iPath DJ-AIG Aluminum (NYSEArca: JJU)
• iPath DJ AIG Nickel (NYSEArca: JJN)
• E-TRACS UBS Platinum (NYSEArca: PTM)
• iPath DJ AIG Platinum (NYSEArca: PGM)
  
• PowerShares DB Gold Short ETN (NYSEArca: DGZ)
• E-TRACS UBS Short Platinum ETN (NYSEArca: PTD)
• PowerShares DB Base Metals Double Long ETN (NYSEArca: BDD)
• PowerShares DB Base Metals Double Short ETN (NYSEArca: BOM)
• PowerShares DB Base Metals Short ETN (NYSEArca: BOS)
• PowerShares DB Gold Double Long ETN (NYSEArca: DGP)
  
• PowerShares DB Gold Double Short ETN (NYSEArca: DZZ)

For more information on metals, visit our precious metals category or base metals category.

For full disclosure, Tom Lydon’s clients own shares of XME.

Max Chen contributed to this article.

Don Dion for The Street notes that several factors play into performance of industrial and base metals:

• Speed and extraction of the metal in the production and mining process.
• Individual, company or sovereign inventory levels; low levels stoke demand, high levels depress it. [Is the Base Metals Run Done?]
• The value of the dollar; a strong dollar tends to decrease demand, a weak dollar improves it.
• China, China, China. The rapidly expanding country has been on a metals buying binge for awhile now. [Metals ETFs: Do They Have Stamina?]

As commodities, metals can be fickle and sensitive to shifting conditions, so it’s key to have your strategy in place before you buy, be prepared to act and watch the trend lines to spot entry and exit opportunities. Equity ETFs might be appealing for investors who want a fund that’s less sensitive to day-to-day price movements. If you’d like exposure that tracks a little closer to the spot price, dig into some of the metals funds that hold futures contracts. [How to Follow Trends.]

For more stories about base metals, visit our base metals category.

• PowerShares DB Base Metals Fund (NYSEArca: DBB)

• SPDR S&P Metals & Mining (NYSEArca: XME)

• iPath DJ AIG Aluminum TR Sub-Idx ETN (NYSEArca: JJU)

• Market Vectors RVE Hard Assets Prod ETF (NYSEArca: HAP)

For full disclosure, Tom Lydon’s clients own shares of XME.

Hopes for a global economic recovery and inflationary precautions have helped metal shares and ETFs stay in peak performance. Carolyn Cui for The Wall Street Journal reports that while commodity prices rebounded sharply from lows early in 2009, most closed well below records set before the economic crisis began in 2008, illustrating where we really are in the economic recovery. [Is it time to be bullish for base metals?]

Demand from emerging economies as well as the catch-up phase for developing economies should help lift up demand and keep it strong. This year should see a continuation of the building efforts of emerging economies, and demand for base metals is likely to get further support as Western manufacturers start to rebuild their inventories. [How hard assets can help your portfolio.]

Last year was a banner one for base metals. Copper, which has many industrial uses, more than doubled, soaring 139%. It ended the year at $3.3275 per pound but still 18% shy of record prices hit in 2008. Lead, which is used in car batteries, also more than doubled to $2,416 a metric ton, followed by zinc, which was up 125%, and aluminum, gaining 50%. [What is in store for commodities in 2010?]

Whether the trend is sustainable is really only a prediction; watch the trend lines for signals of any potential long-term uptrend. [How to follow trends.]

For more stories about metals and mining, visit our metals and mining category.

• SPDR S&P Metals & Mining (NYSEArca: XME)

• Market Vectors RVE Hard Assets Prod ETF (NYSEArca: HAP)

• iPath DJ AIG Aluminum TR Sub-Idx ETN (NYSEArca: JJU)

• iPath DJ AIG Lead TR Sub-Idx ETN (NYSEArca: LD)

• PowerShares DB Base Metals (DBB)

Jefferies

The latest funds from Jefferies are based upon the Thompson Reuters/Jefferies CRB-EQ series of indexes. The equity-based funds track the industrial metals and agriculture indexes, explains Ron Rowland for Seeking Alpha.

The ETFs are:

• Jefferies/TR/J  CRB Global Agriculture Index (NYSEArca: CRBA)
• Jefferies/TR/J  CRB Global Industrial Metals Equity Index Fund (NYSEArca: CRBI)
  

CRBA holds equity securities from global universe of listed companies engaged in the production and distribution of agricultural products, including grains, livestock, fertilizers, chemicals, seeds, traits (seed characteristics attained through genetic modification) and equipment. (Another Jefferies Commmodity ETF launched earlier this month).

CRBI offers investors access to shares of companies across the globe engaged in the production and distribution of base/industrial metals and base/industrial metal products, including copper, aluminum, iron ore, steel, nickel and others. (Where copper and steel prices are going).

Both funds come with a 0.65% expense ratio.

These funds will not be affected by regulations expected from the Commodity Futures Trading Commission (CFTC), because they hold equities and not futures. (How regulations could change commodity ETFs).

For more stories about new ETFs, visit our new ETF category.

September retail sales rose 0.6%, better than what analysts had expected. Retailers have been hurting for more than a year now as consumers have increasingly tightened the grip on their wallets, reports Kevin Kingsbury for The Wall Street Journal. Despite the increase, the bad news is that retail sales are at 2005 levels. SPDR S&P Retail (NYSEArca: XRT) is up more than 2% this morning. (Read more about the retail sector here).

Alcoa (NYSE: AA) notched a surprise profit after the market closed yesterday through a combination of cost-cutting steps and higher aluminum prices, reports Reuters. The report comes after three straight quarterly losses. Wall Street had expected another loss. iShares Dow Jones U.S. Basic Materials (NYSEArca: IYM) is up nearly 3% this morning. Alcoa is 3.7%.

The number of newly laid-off workers filing for unemployment has dropped to the lowest number since the  start of this year. It’s the fourth drop in new claims in five weeks, and is being taken as a sign that some healing in the job market is still taking place.

The European Central Bank and the Bank of England both opted to keep their interest rates unchanged, leaving them at record lows of 1% and 0.5%, respectively, report George Frey and Robert Barr for the Associated Press. While the eurozone’s two largest economies – France and Germany – are technically out of a recession, authorities want to keep growth moving in the right direction. The iShares MSCI EMU (NYSEArca: EZU) is up more than 2% this morning. You can read more about Europe’s recovery efforts here.

August wholesale inventories declined for a record 12th straight month in August. This indicates that companies are shrinking orders to factories. But more encouraging is that sales at the wholesale level rose by the largest amount in 14 months, reports Martin Crutsinger for the Associated Press.

Credit Suisse Group is planning to launch an aluminum-focused ETF. If the fund receives the green light, the merchant, Glencore, will need to buy aluminum as physical backing for the fund. The Swiss company has yet to make a regulatory filing, so it’s unclear as to when this fund would come to pass, explains Andrea Hotter for The Wall Street Journal.

So why is the timing of an aluminum ETF full of promise? Here are some reasons:

• The timing for this ETF would be optimal. Many aluminum companies were swift to cut production when prices more than halved as the economic downturn crimped demand. Now, that smelters have jumped back into action, the market has suffered.
• On the London Metal Exchange, aluminum is at around $1,800 a ton, up about 50% from seven-year lows in February. The supply push is threatening to send prices to lower, so an ETF would soak up the excess metal.
• One high-profile financing deal is between Russian aluminum producer United Co. Rusal and Glencore. The producer recently held talks with Glencore and other traders over the supply of surplus aluminum.
• If the ETF is successful,it could ease up the price depression. As an example, ETFs have become one of the biggest growth areas for gold demand.

For more stories about aluminum, visit our aluminum category.

Hard-asset ETFs can be used to both diversify a portfolio as well as protection from both inflation and broader market turmoil, comments Don Dion for TheStreet.

Some hard asset ETFs don’t hold futures or physical commodities. Instead, these funds track indexes made up of the stock of commodity producers. Some broad equity-based, hard-asset ETFs include:

• SPDR S&P Metals & Mining (NYSEArca: XME), currently up 66.8% year-to-date, includes U.S. metals and mining companies. The fund has an expense ratio of 0.35%.
• Market Vectors RVE Hard Assets Prod ETF (NYSEArca: HAP), currently up 29.9% year-to-date, this fund seeks to reflect the Rogers-Van Eck Hard Assets Producers Index, which is often quoted as the definitive commodity equities benchmark. HAP also holds water and renewable energy components in its portfolio.

iPath offers both broad and specific exposure to hard assets with a line of exchange traded notes (ETNs) that track the futures contracts and Treasuries. Potential investors in these ETNs should be aware of regulatory actions that the Commodity Futures Trading Commission (CFTC) may impose.

• iPath DJ AIG Ind Metals TR Sub-Idx ETN (NYSEArca: JJM): up 45.6% year-to-date; includes a basket of commodities.
• iPath DJ AIG Tin TR Sub-Idx ETN (NYSEArca: JJT): up 42.3% year-to-date
• iPath DJ AIG Platinum TR Sub-Idx ETN (NYSEArca: PGM): up 32.5% year-to-date
• iPath DJ AIG Lead TR Sub-Idx ETN (NYSEArca: LD): up 114.7% year-to-date
• iPath DJ AIG Aluminum TR Sub-Idx ETN (NYSEArca: JJU): up 10.5% year-to-date

ETF Securities has successfully launched global physical-asset ETFs:

• ETFS Silver Trust (NYSEArca: SIVR): up 9.8% in the last month
• ETFS Gold Trust (NYSEArca: SGOL): down 1.3% in the last week

Larry Swedroe, principal and director at Research at BAM advisor Services and at Research for Buckingham Family of Financial Services, says that purchasing commodities is a way to protect against supply shocks and event risks that could negatively influence a portfolio of stocks and bonds, according to iStockAnalyst.

Swedroe also argues that position limits on commodity ETFs are “purely politically driven,” which could create conditions of more volatility. The ultimate outcome, he says, will result in the value of contracts being driven higher and people having to pay more for insurance.

For more information on commodities, visit our commodity category.

Max Chen contributed to this article.

China’s cabinet is no longer approving new projects for energy-intensive aluminum production for three years. Chuin-Wei Yap and Juan Chen and Yue Li for Dow Jones Newswires report that the State Council, also issued new rules to contain excessive capacity in seven other sectors, including revisiting a years-long campaign to curb steel output.

The ban on new aluminum capacity, a popular metal, is primarily meant to rein in the energy-guzzling and hard-to-control industry. The markets have so far shrugged off the news.

The Chinese markets and the U.S. dollar weakness has helped prop the base metals market up, and the underlying demand is strong indicator that emerging markets have some resilience to the economic downturn, says Dorothy Kosich for MineWeb.

One analyst notes that base metals prices have hit “mid-cycle” levels, something that normally takes years after a global downturn. The analyst also predicts that copper will be the top performer among base metals, and forecasts China’s consumption to grow 20% this year.

Some related ETFs and exchange traded notes (ETNs):

• iPath Dow Jones AIG Copper TR Sub-Index ETN (NYSEArca: JJC): up 91.2% year-to-date

• iPath Dow Jones AIG Lead TR Sub-Index ETN (NYSEArca: LD): up 119.3% year-to-date

• Market Vectors Steel ETF (SLX): up 80% year-to-date

For more stories about base metals, visit our base metals category.

We wrote a report back then, which thoroughly covered the commodities area, from the broad-based funds to the single commodities. From that report, many commodities went on to hit record highs.

How things have changed. Oil, gold, gas and more all have corrected sharply. It’s a matter of great debate now what’s going to happen next. One thing that’s for certain is that the tanking of most commodities illustrates the importance of having an exit strategy. Our own is to exit when a fund is 8% off the recent high or below its 200-day moving average – and most commodities are off their highs by double digits.

Right now, there’s a looming threat of inflation. The government is printing new money by the truckload, which could lead to an inflationary situation down the road. Commodities are often high first, which is why they’re still worth keeping an eye on despite the correction.

Some, like Jim Rogers, say not to count out commodities, now or ever. That’s because the credit crisis is creating an inability for farmers to get loans, which means they can’t grow. This will lead to supply shortages, after which high prices ultimately will follow. Food demand is expected to increase, as populations in emerging markets boom and many of those areas adopt a more western diet. Staple commodities, such as corn, soybeans, wheat and sugar could very well continue to see historic levels of demand. And the assets flowing into such ETFs don’t seem to have slowed much, either.

This fascinating chart from U.S. Global Investors shows how commodities over time might have price swings, but eventually revert to their long-term averages, also known as “mean reversion.” Not one category in this chart has shown any consistency in the nine-year period it tracks. By allocating your assets and remaining diversified, investors can gain some volatility protection.

Oil has been holding steady for a few weeks, around the $40 a barrel mark. There’s a big fight going on now: declining consumer demand that remains far below production, and OPEC can’t seem to cut production enough at this point.

Gas prices are moving up, however. In the last month, the cost of a gallon of gas in Orange County has risen 27 cents. The disconnect between the two can be blamed on refineries, which are operating at their lowest capacity since 1992.

The outlook for gold is mixed. While there’s agreement that prices will probably stay put for now, the question is how high will they go? Some call for $1,500 an ounce, others are expecting as high as $2,000 an ounce.

No one can say for certain where commodities are headed, which is why we so firmly adhere to the trend-following strategy instead of relying on predictions that are often at odds with one another. Many hours have been spent by experts, trying to call which way commodities will go and when. For now, we’re going to wait for the trend to appear. At the moment, it’s simply not there.

• PowerShares DB Agriculture (DBA) is an ETF that contracts on some of the most liquid and widely traded agricultural commodities — corn, wheat, soybeans and sugar. DBA hit a high on Feb. 26, 2008, and has fallen 41.3% since then.

• Market Vectors Global Agribusiness (MOO) tracks the stock-based DAXglobal Agribusiness Index and provides exposure to 40 worldwide companies in five segments: agricultural chemicals, agriproduct operations, agricultural equipment, livestock operations and ethanol/biodiesel production. The top five components, by market weight, include: Mosaic Co. (MOS), Potash Corp. (POT), Monsanto Corp. (MON), Deere & Co. (DE) and Archer-Daniels-Midland (ADM). MOO’s high was on June 17, 2008; it has since declined 54.3%.

MOO made a distribution on Dec. 26 that is not reflected in the chart above.

• ELEMENTS Rogers International Commodity Agriculture ETN (RJA) seeks to replicate an index that represents the value of 20 agricultural commodity futures contracts. RJA’s high was hit on Feb. 26, 2008, and the ETN has declined 44.2% since then.

• For a more diversified energy play, the PowerShares DB Energy Fund (DBE) replicates an index tracking the prices of two different grades of crude oil, heating oil, gasoline and natural gas. The high was reached on July 3, 2008; since then, DBE has lost 64.9%.

• United States Gasoline (UGA) tries to match the percentage increase in the unleaded gasoline futures that trade on the New York Mercantile Exchange. In concept, this fund increases in value by the same amount that gas rises in price at the pump. UGA reached a high on July 2, 2008, but has fallen 64.9% since then.

• iShares Dow Jones U.S. Energy Sector Index Fund (IYE) is as pure a play on energy as you can get with 10 top holdings including: Chevron (CVX), ConocoPhillips (COP), Exxon Mobil (XOM) and Transocean (RIG). IYE has fallen 43.3% since its May 20, 2008, high.

IYE made a distribution on Dec. 23 that isn’t reflected in the chart above.

• iPath S&P GSCI Crude Oil Total Return Index ETN (OIL) is an unleveraged path to investment in Nymex West Texas intermediate crude oil futures. It takes a fixed-weight approach to determining asset allocation of its portfolio. OIL has lost 78.5% since its July 11, 2008, high.

• The SPDR Gold Shares Fund (GLD) and iShares COMEX Gold Trust (IAU) hold gold bullion. GLD and IAU have both lost 10.9% and 11.1% respectively since their highs on March 17, 2008.

• The PowerShares DB Gold Fund (DGL) is based on the Deutsche Bank Liquid Commodity Index and is composed of futures contracts on gold and is intended to reflect the performance of the yellow metal. DGL has lost 12.6% since its March 17, 2008, high.

• Market Vectors Steel (SLX), which launched in October 2006, holds companies involved in the production of steel. Among the top holdings are Rio Tinto (RTP), Arcelor Mittal (MT.AS) and Companhia Vale ADS (RIO). SLX reached a high on May 16, 2008, but has since dropped 69.9%. On the other hand, there are high hopes for steel if President Barack Obama’s stimulus plan goes through. In the last month, it’s advanced 5.4% and moved above its short-term trend line.

SLX made a dividend on Dec. 26 that is not reflected in this chart.

• The iShares Silver Trust (SLV) holds silver bullion. Silver has a wide range of industrial applications, making it particularly attractive when there’s a boom in construction activity, but sensitive to dowturns. SLV has lost 38.3% since its March 5, 2008, high.

• PowerShares DB Base Metals (DBB) is based on an index composed of futures contracts on some of the most liquid and widely used base metals — aluminum, zinc and copper (grade A). DBB has lost 56.8% since its May 4 , 2007, high.

• iShares S&P GSCI Commodity Indexed Trust (GSG) tracks a broad index of 24 commodities weighted according to the proportion of the commodity flowing through the economy. Almost half of the index reflects crude oil, and the balance is split between other energy products such as natural gas as well as agricultural commodities, industrial and precious metals, and livestock. It hit a high on July 2, 2008, and has fallen 66.4% since then.

• An even more diversified commodity play is the iPath Dow Jones-AIG Commodity Index Fund ETN (DJP), which tracks an index that comprises 30% energy, 30% agricultural, 20% industrial metals, 10% livestock and 10% precious metals. DJP’s high was reached on July 2, 2008, but has lost 53.4% since then.

• PowerShares DB Commodity Index Tracking Fund (DBC) tracks the futures for a simplified index of just six commodities: corn, crude oil, gold, heating oil, aluminum and wheat. It hit a high on July 2, 2008, and has fallen 56.5%.

DJP made a distribution on Dec. 15 that is not reflected in this chart.

For full disclosure, some of Tom Lydon’s clients own shares of SLX, SLV and GLD and is a board member of U.S. Global Investors.