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.

Investors are all over platinum these days; coupled with improving industrial demand and a tight mining supply, and it’s a recipe for a potentially long-term uptrend:

• South Africa’s mines are responsible for 80% of the world’s platinum output; margins are getting squeezed at some mines, and one solution could be to scale back production volumes.
• Auto sales are still tepid, but much improved. Platinum is a key component in catalytic converters, which help reduce emissions.
• ETF Securities‘ new ETFs are adding a new layer to demand for the metals; in just a few weeks, the funds have amassed more than $500 million in assets under management.

Platinum prices are up around 1% at $1,535 an ounce, with palladium 5% higher at $445 an ounce, well above 2009 lows of $920 and $180 respectively, says Matthew Curtain for The Wall Street Journal. [Why Platinum May Be the New Gold.]

What could put a dent in platinum and palladium’s shine? Look out for a rise in interest rates, which could damage the appeal of zero-yielding assets, such as metals and ETFs. There are also large stockpiles of palladium in Russia, which can be released as needed to keep the markets in equilibrium. [The "Other" Precious Metals.]

For more stories about platinum or palladium, visit out platinum category.

• ETFS Physical Platinum (NYSEArca: PPLT)

• ETFS Physical Palladium (NYSEArca: PALL)

• E-TRACS UBS Bloomberg Long Platinum ETN (PTM)

• iPath Dow Jones AIG Platinum TR Sub-Index ETN (PGM)

First Trust is getting ready to launch a couple of ETFs focusing on platinum and copper, which will track the First Trust ISE Global Copper Index Fund and the First Trust Global ISE Platinum Index Fund.  [Why the timing is good.]

The ETF Professor on Benzinga reports that the ETFs will hold miners, materials and refining companies. There’s no word just yet on specific components in the funds. [Are base metals on pause?]

Expense ratios are believed to be 0.70% for each ETF.

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

The new funds would join other platinum and copper funds trading now:

• ETFS Physical Platinum Shares (NYSEArca: PPLT)

• E-TRACS UBS Bloomberg Long Platinum ETN (PTM)

• iPath Dow Jones AIG Platinum TR Sub-Index ETN (PGM)

• iPath Dow Jones Copper Index (NYSEArca: JJC)

Metals manufacturers and miners have reason to rejoice: auto sales around the world are skyrocketing, particularly in emerging markets with growing middle classes. Exchange traded funds (ETFs) are a great vehicle (ha!) to get exposure to the reinvigorated market.

The auto market has good reason to feel optimistic heading into earnings season.

• AK Steel (NYSE: AKS) reported earnings in line with expectations, citing improved momentum in the auto market. Nucor Corp. (NYSE: NUE) also returned to profit after three consecutive losses, surpassing U.S. Steel Corp. (NYSE: X). [Why coal and steel are set in 2010.]
• U.S. chemical maker DuPont Co. also reported an expectation-beating fourth-quarter profit that surged past analysts’ estimates, reports Jack Kaskey for BusinessWeek. DuPont also cited auto demand, which increased the need for its automotive plastics and electronics materials.
• Corning Inc. (NYSE: GLW) reported that fourth-quarter net income almost tripled partly on demand for emission-control products as the auto industry builds supplies.

While sales in the United States are still tepid, take a look at what’s happening globally:

• It’s predicted that Brazil, Russia, India and China (BRIC) will account for 30% of the world’s auto sales in 2014, reports the Economic Times.
• Toyota (NYSE: TM) has implemented an ambitious plan see its annual global sales rise this year for the first time in three years. The United States and Japan are expected to drive the growth.
• GM is anticipating that it will need a new plant in China as sales rise there. China is the world’s largest auto market – sales of GM cars in China last year shot up 66.9% from 2008, says Reuters.
• European auto registrations are up, rising 16% in December compared with the same month a year earlier, according to the European Automobile Manufacturer’s Association. [Platinum is becoming as popular as gold.]

There’s no direct way to play the auto market with ETFs. Until there is, investors will have to content themselves with funds that offer broader exposure to the industry’s growth, including via the funds below.

For more stories about steel, visit our steel category.

• Market Vectors Steel (NYSEArca: SLX)

• ETFS Physical Platinum Shares (NYSEArca: PPLT)

• iPath Dow Jones AIG Platinum TR Sub-Index ETN (PGM)

• E-TRACS UBS Bloomberg Long Platinum ETN (PTM)

ETF Securities‘ platinum and palladium ETFs had a resoundingly successful first week, hitting $350 million in assets. The funds also saw trading volume upward of 300,000 shares for palladium and 450,000 for platinum. [Platinum and palladium ETFs are here.]

The London Bullion Market Association forecasts that platinum prices will range between $900 and $2,578 an ounce this year, with an average of $1,550. This may seem radical, considering much of the platinum demand comes form the now-sluggish auto industry. [How demand for other metals besides gold is growing.]

Tony Daltorio for Investment U outlines a few reasons why platinum is primed to have a standout year in 2010:

• Auto demand up in China: China’s fast growth has put this country in the lead as far as the auto industry goes. Car sales in China shot up by nearly 53% to 10.3 million in 2009, while total auto sales – including heavy commercial vehicles – rose 46.2% to 13.8 million units. Experts still expect the sector to post a solid year-on-year gain of 10%–15% this year.
• Platinum Jewelry Market: Even when the West began thinking twice about buying any jewelry in the face of the economic crisis, China stepped in to buy large amounts at the lower prices. Much of the demand for platinum comes from the jewelry market, where fashion trends and economic factors have increased interest in the metal.
• A platinum ETF launches in the United States: ETFS Physical Platinum Shares (NYSEArca: PPLT) is the first physically-backed platinum focused ETF to trade in the United States. According to its creators, PPLT will start out with $500 million or roughly 329,000 ounces at current prices – a significant figure considering that the commodity’s surplus for 2009 was only about 100,000 ounces. [Can these ETFs outdo gold in 2010?]

For more stories about platinum, visit our platinum category.

There are a variety of ways to play platinum and palladium with ETFs and exchange traded notes (ETNs), including the following [Differences between ETFs and ETNs.]:

• ETFS Physical Platinum Shares (NYSEArca: PPLT)
• ETFS Physical Palladium Shares (NYSEArca: PALL)
• E-TRACS UBS Bloomberg Long Platinum ETN (PTM)
• iPath Dow Jones AIG Platinum TR Sub-Index ETN (PGM)

ETF Securities, which has offered a physically-backed platinum fund in Europe, has launched two similar funds here:

• ETFS Physical Platinum (NYSEArca: PPLT)
• ETFS Physical Palladium (NYSEArca: PALL)

Already, Reuters has noted that trading volume has been robust on their first day.

Each trust will custody all of the physical metal in plate and ingot form in a secure London Platinum Palladium Market-approved vault. The metal in the vault will undergo a bi-annual audit from an independent specialist, and ETF Securities’ website will contain all the identification numbers and audit information.

Platinum and palladium have a range of precious metal attributes, but they’ve also got a range of industrial applications. Most notably, they’re used in the automobile industry in catalytic converters, which remove emissions. As the green energy sector gains momentum and auto sales recover, platinum and palladium are in a strong position to benefit.

Until these funds launched, U.S. investors could access platinum through exchange traded notes (ETNs), and there was no palladium ETN. ETNs act like they own the physical commodity, although they don’t. [Platinum plays for price runs.]

The two new funds will buy and sell “baskets” of metal to handle liquidations and purchases. The prospectus for the funds state that the trusts will be discontinued and liquidated if the fund doesn’t have $350 million on its books in the first year. The ETFS Palladium Trust will sell $250 million in shares and the ETFS Platinum Trust will start out with $500  million.

For more information on platinum, visit our platinum category.

• E-TRACS UBS Bloomberg Long Platinum ETN (NYSEArca: PTM): up 3.1% in the last month

• iPath Dow Jones AIG Platinum TR Sub-Index ETN (NYSEArca: PGM): up 4.3% in the last month

Max Chen contributed to this article.

Platinum’s price premium over gold has recently been shrinking, but platinum should continue to prevail, because it’s one of the rarest precious metals.  Platinum prices have climbed more than 36% from their low in early July to trade at highs above $1,500 an ounce, levels not seen in 15 months, reports Commodity Online. (How hard asset ETFs can benefit you).

Analysts say that some of the price jump has to do with the pending launch of a platinum-backed fund from ETF Securities, while the rest of it has to do with gold’s rally to record prices. ETF Securities already has platinum funds in London and Asia, which have shown gains of 60% year-to-date and and 9% since August, respectively. (ETF plays for other metals).

A possible drop off in industrial demand is the major hurdle that platinum is facing, as growth in Chinese jewelry demand may not be enough to make up for the sluggish market. Any rebound in the auto industry, however, could pick up the slack. (How far off is a rebound in the auto industry?)

For now, investors will have to content themselves with other ways to get exposure to the precious metal. Note that the two funds below are exchange traded notes (ETNs), so they come with credit risk. (How ETFs and ETNs differ). For more stories about platinum, visit our platinum category.

• E-TRACS UBS Bloomberg Long Platinum ETN (PTM): up 49.8% year-to-date

• iPath Dow Jones AIG Platinum TR Sub-Index ETN (PGM): up 65.5% year-to-date

Barclays Bank PLC has temporarily suspended any further sales from inventory and any more issuance of the ETN iPath Dow Jones AIG Platinum TRSub Index (NYSEArca: PGM), write Kristin Friel and Christine Hudack for Trading Markets.

The suspension of notes may cause deviations in the trading value – more commonly known as tracking error – of the ETN. By limiting the issuance and sales, an imbalance of supply and demand in the secondary market for the notes may occur, and the result would be notes trading at a premium or discount in relation to the baseline value. (How to play precious metals with ETFs and ETNs).

Commodity ETFs have been grappling with potential CFTC regulations for the last several months. (How times are changing for commodity ETFs).

ETNs  are unsecured obligations, not secured debt. The securities have no principal protection; thus, riskier than ordinary unsecured debt securities. (Seven differences between ETFs and ETNs).

For more information on platinum, visit our platinum category.

• iPath Dow Jones AIG Platinum TRSub Index (NYSEArca: PGM): up 49.7% year-to-date

Other platinum ETNs are unaffected, including E-TRACS UBS Short Platinum ETN (NYSEArca: PTD) and E-TRACS UBS Long Platinum (NYSEArca: PTM).

Max Chen contributed to this article.

There are many reasons to buy into a precious metals investment, and ETFs can give the desired  exposure to gold, silver and platinum.

Gold. Gold is the godfather of all the precious metals for various reasons, according to Aryeh Katz for Investopedia:

• Gold is a safe haven and is recognized by almost all governments as being a safe store of value
• Inflationary pressures can be hedged with gold (read more on fighting inflation with ETFs here)
• War and political upheaval have always sent people into gold-hoarding mode; an entire lifetime’s worth of savings can be made portable and stored until it’s needed

Moming Zhou for MarketWatch reports that Jim Rogers recently claimed gold will hit $2,000 per troy ounce within the decade. As long as the U.S. dollar continues to weaken, gold prices could continue to rise because gold priced in dollars will become cheaper for overseas buyers (Read 7 more things you should know about gold here).

• SPDR Gold Trust (NYSEArca: GLD)
• iShares COMEX Gold Trust (NYSEArca: IAU)
• PowerShares DB Gold (NYSEArca: DGL)
• ETFS Physical Swiss Gold Shares (NYSEArca: SGOL)
• Market Vectors Gold Miners (NYSEArca: GDX)
• E-TRACS UBS Bloomberg CMCI Gold ETN (NYSEArca: UBG)

Silver. Silver – the “poor man’s gold” – is also a good way to hedge against inflation, and it benefits from its appeal as both an industrial and precious metal. This means that it can be treated as a safe haven investment, as well as an investment for investors looking to benefit from an uptick in industrial demand. A note of caution:  since silver’s market is smaller than gold’s, it can be more volatile. Silver’s main investment approach is determined by factors such as:

• Silver’s role in photography and film has kept demand high; however, the advent of digital cameras has dented the need for silver
• Middle class population growth in emerging markets is great, and this demand for industrial and electrical supplies puts much more pressure on the silver store
• Silver’s use in batteries, superconductor applications and microcircuit markets is a major source of demand
  

• ETFS Physical Silver Shares (NYSEArca:SIVR)
• iShares Silver Trust (NYSEArca: SLV)
  
• PowerShares DB Silver (NYSEArca: DBS)
• E-TRACS UBS Bloomberg CMCI Silver (NYSEArca: USV)
  

Platinum. Platinum tends to fetch a higher price than gold during routine periods of market and political stability simply because it’s much rarer. Other factors affecting platinums price include:

• The greatest demand for platinum comes from automotive catalysts, which are used to reduce emissions; after this, jewelry accounts for the majority of demand
• Auto sales and production numbers are also determinants of platinum’s price
• Platinum mines are heavily concentrated in two countries: South Africa and Russia; This places much more pressure on the platinum market.

Jeff Nielson for DNA reports that the direction of the precious metals markets are not easy to determine in the short term. The longer the time horizon (and the larger the data stream), the more predictable are the movements of companies, commodities, and overall markets.

Various ETFs that give exposure to precious metals:

• E-TRACS UBS Long Platinum ETN (NYSEArca: PTM)
• iPath Dow Jones AIG Platinum TRSub Index (NYSEArca: PGM)

In addition to specific exposure to metals ETFs, investors can also find broad metal ETFs that hold either the metals themselves, futures contracts or the stock of companies involved in the production of these metals:

• PowerShares Global Gold & Precious Metals (NYSEArca: PSAU)
• SPDR S&P Metals & Mining (NYSEArca: XME)
  
• Emerging Global Shares DJ Emerging Markets Metals & Mining Titans (NYSEArca: EMT)
• PowerShares DB Precious Metals (NYSEArca: DBP)
• iPath Dow Jones AIG Precious Metals TR Sub Index (NYSEArca: JJP)
  

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

For full disclosure, Tom Lydon’s clients own shares of GLD and SLV.

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.