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.

Gold’s amazing advance this year could be marked by high volatility and corrections along the way, but does the metal have the strength to remain one of the hottest investments into the new year? [Why the dollar bulls are ready to charge.]

Paul Farrow for Telegraph talked to industry experts, and here is what they have to say:

• Ted Scott/ Director, UK Strategy. The only way that gold can underperform is if the United States and other developed economies recover in a conventional way by cutting spending and raising taxes while at the same time embarking on a period of stable economic growth.
• Jim Rogers/ Commodity expert. I have learned the hard way not to sell something short in a cyclical bull market. I’m not buying anything now, but if I am buying, I’ll be buying agriculture, silver, natural gas, palladium and all things that are very depressed.
• ODL Markets/London Retail Trading Experts. The recent surge in gold prices has come as people move out of dollar holdings; but a resurgent dollar can have the opposite effect. We are now back down to the lowest levels seen in a few weeks but still remain just ahead of support at $1100.
• Macquarie Investment Bank. Their 2010 projections call for a $1,150 and $1,100 per ounce average gold price in 2010 and 2011, respectively. With respect to silver, Macquarie has raised their forecast to $17.69 in 2010 and $16.92 in 2011.
• Ian Henderson/ JP Morgan. I think investors should focus on what is happening to currency as that is the prime mover. The general sentiment is in favor of diversification but I don’t think that the metal will move by enormous amounts.
• Suki Cooper/ Barclays Capital. In terms of technical trends the prospects for gold look strong but the underlying fundamentals look weak. Commodities Research has a quarterly average for Q1 2010 is $1050, but our technical analysts have a target of $1120.
• Evy Hambro/ BlackRock. The recent new all-time high in the price of gold seems to have been caused by the convergence of a number of important drivers. Falling mine supply, a weaker U.S. dollar and the potential for a reduction in net central bank sales will all support prices over the medium term. [Are gold bugs creating a bubble?]

The surge in gold is being driven by five major factors: inflation concerns, liquidity chasing asset prices, carry trade and diversification of U.S. dollar, supply cannot keep up with demand and sovereign risk is getting higher, says The Pragmatic Capitalist. [Is gold's hiatus temporary?]

For more stories about gold, visit our gold category.

This year not only marked a record run for gold prices, but it also marked the introduction of more ways to play the metal. Among the options investors have now include:

• iShares COMEX Gold Trust (NYSEArca: IAU)
• UBS E-TRACS Bloomberg CMCI Gold Total Return ETN (NYSEArca: UBG)
• PowerShares Global Gold & Precious Metals (NYSEArca: PSAU)
• SPDR Gold Trust (NYSEArca: GLD)
• PowerShares DB Gold Fund (NYSEArca: DGL)
• Market Vectors Gold Miners (NYSEArca: GDX)
• Market Vectors Junior Gold Miners (NYSEArca: GDXJ)
• PowerShares DB Gold Double Short (NYSEArca: DZZ)
• PowerShares DB Gold Double Long (NYSEArca: DGP)
• PowerShares DB Gold Short (NYSEArca: DGZ)
• ProShares Ultra Gold (NYSEArca: UGL)
  

Gold’s decline today is part of a ripple effect emanating from last Friday’s unemployment report, which showed a 0.2% decline in November from October. Those numbers have investors betting that the Federal Reserve could raise rates, which is pushing the dollar higher, reports Devon Maylie for The Wall Street Journal. A strong dollar makes gold priced in dollars more expensive for overseas buyers.

If gold continues to decline, short gold funds can help investors hedge the losses. Read up on leveraged and inverse ETFs before you buy to understand how they work. Some options include the ProShares UltraShort Gold (NYSEArca: GLL) and PowerShares DB Gold Double Short (NYSEArca: DZZ).

How much do various factors influence the price of gold today? Reports Julian D. W. Phillips for Goldseek has some answers:

• Oil prices. Oil’s price as an indicator of gold prices is in question. As oil prices shot to nearly $150 a barrel in 2008 before plummeting to $35, gold prices didn’t budge.
• The exchange rate. On a day-to-day basis, the strength or weakness of the U.S. dollar can trigger movements in gold’s prices.

Gold is breaking away from all currencies, so to speak, and becoming a major measure of the entire global system at large. (Read about gold’s record rally).

Overall, this is what led gold to the high it has experienced and as central banks are turning to gold and buying it up, but gold’s next move is up to them. (Other major metals that are enjoying the ride up).

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

• SPDR Gold Shares (NYSEArca: GLD): up 31.5% year-to-date

• ETFS Physical Swiss Gold Shares (NYSEArca: SGOL): up 6.2% in the last month

Gold has now slumped to its lowest price in more than a year, following the government’s takeover of Fannie Mae and Freddie Mac, reports Feiwen Rong for Bloomberg.

The dollar index, meanwhile, rose to a one-year high, boosting the PowerShares DB US Dollar Index Bullish (UUP). UUP and SPDR Gold Trust (GLD) compared:

According to one commodity broker, the markets are torn between investing in gold ahead of the Indian wedding season and those selling gold as a result of the dollar’s strength.

According to ZEAL Speculation and Investment, Indian wedding season tends to cause a rally in gold prices in early October through late November. Families of Indian brides give them wedding gold in the form of 22-karat jewelry. India is the world’s largest consumer of gold, much of it in the form of jewelry, and about 40% of India’s gold demand occurs during this wedding season.

Morgan Stanley seems bearish on precious metals, cutting its price forecasts for both gold and silver. Analysts now say gold may average $900 an ounce in 2008 and $950 next year, down from forecasts of $950 this year and $1,000 next year.

Platinum futures have also fallen, to an 18-month low, and palladium stepped back as the dollar hit an 11-month high against the euro, reports Dave McCombs for Bloomberg. Low demand for autos is blamed, because platinum and palladium are used in emissions systems.

Other ETFs affected include:

• PowerShares DB Gold Double Short ET (DZZ), up 44.8% since Feb. 28
• iShares Silver Trust (SLV), down 18.7% year-to-date
• iPath DJ AIG Platinum TR Sub-Index ETN (PGM), down 31% since July 8 inception
• ELEMENTS MLCX Precious Metals ETN (PMY), down 24.2% since April 4 incpetion

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