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.

Analysts are sharply divided these days: on one side are the dollar bulls who think the dollar will strengthen and gold will weaken; on the other side are the dollar bears, who think gold is only warming up. Willfred J. Hahn for Index Universe questions those who believe gold’s price is set to soar again and has a few points to make about the current market:

• Gold prices have been rising because currencies the world over are mostly in a weakening phase and governments are printing money fast and furiously.
• The current gold rush is at best, already over. If everybody is talking about it, it may be finished. And the timing of jumping onto the golden bandwagon presents itself at an expensive price.[Regulators and Precious Metals.]
• The previous “gold rush” that occurred between 1980 and 1982 took  the price of an ounce of gold then to above $800 from a level of less than $100. Emotional buying and the herd mentality never pays off, and eventually gold came back to around $260 levels. If you own gold, it’s a store of wealth but you can’t live on income generated from the metals.
• The bottom line is that you should watch the financial trends and the 200-day moving average for your answer to the golden question. Look at trends in other commodities, too. There are plenty of them out there and you may not be buying at a premium. [What to Know About Commodities.]

Experts are predicting that gold investment this year is going to soar, thanks to another year full of potential financial uncertainties, says Marketwire. [How Precious Metal ETFs Have Changed Investing.]

Alix Steel for The Street spoke with Mike Maloney, the author of Rich Dad’s Guide to Investing in Gold and Silver, who believes that silver prices could not only hit quadruple digits, but it could outperform gold in the long run. Whatever silver actually does, Maloney says silver should perform alongside gold.

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

• ETFS Physical Gold Shares (NYSEArca: SGOL)
• PowerShares DB Gold (NYSEArca: DGL)
• SPDR Gold Shares (NYSEArca: GLD)
• iShares COMEX Gold Trust (NYSEArca: IAU)
• PowerShares DB Silver (NYSEArca: DBS)
• iShares Silver Trust (NYSEArca: SLV)
• ETFS Physical Silver (NYSEArca: SIVR)
  

ETF Securities

ETFS Physical PM Basket Shares is set to be issued through a trust, which will be valued on the basis of London afternoon prices for gold, platinum and palladium and by the silver fix at approximately noon London time. The shares will trade on the NYSE Arca platform, says Matt Whitaker for The Wall Street Journal. [First Trust's Filing for an Equity Platinum ETF.]

ETF Securities’ filing follows several big happenings on the precious metals ETF front. The provider launched the first U.S.-listed platinum and palladium funds recently, and they’ve been given an enthusiastic reception from investors. Holdings in all the ETF Securities funds trading total more than $1 billion. [Read about the latest platinum and palladium backed ETFs here.]

Meanwhile, Global X has filed for a suite of mining ETFs aimed at copper, gold, platinum and silver. [More on the Global X Filing.]

For more stories about precious metals, visit the category.

Global X Funds

So far, precious metals have been about as popular as emerging markets, especially within the ETF category. Daniel Tovrov for Mutual Fund Wire says the new funds filed for include: Global X Copper Miners, Global X Gold Miners, Global X Platinum Miners and the Global X Silver Miners ETFs. [Platinum and Palladium ETFs Are Hot.]

Precious metal ETFs have been luring assets left and right. Two of the  most popular funds in recent weeks are the new ETFS Platinum Shares (NYSEArca: PPLT) and ETFS Palladium Shares (NYSEArca: PALL), which together have more than $500 million in assets.

Global X currently has a line of ETFs that focus on sectors China, as well as single-country offerings aimed at the Nordic countries and Colombia. [More on Global X's China ETFs.]

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

Yesterday, most metals finished lower after China made more moves to curb lending and rein in growth. Several large banks in the country were singled out and required to raise their reserve ratios, reports Nick Godt for MarketWatch.

Copper was especially feeling the pressure and futures declined nearly 2% in trading today. Copper could be hit hard if tightening in China translates into reduced demand for the metal. The dollar also strengthened yesterday, further tamping down demand, reports Allen Sykora for The Wall Street Journal. [Opportunities in other metals?]

Metals like copper, silver and aluminum have benefited in recent years from the huge increase in demand, particularly from China. As the global economic recovery deepens and emerging nations industrialize, many believe that demand for these metals should continue in the long run. [A deeper look at copper and its near future.]

Among the believers is the International Monetary Fund (IMF), which said today that it expects commodity prices to continue to rise amid recovery. In the short-term, though, base metals may be taking their cues from the dollar, economic numbers and the overall risk appetite in the markets, reports Commodity Online.

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

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

• iPath DJ AIG Copper TR Sub-Index ETN (NYSEArca: JJC)

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

• PowerShares DB Base Metals (NYSEArca: DBB)

Jeffrey Lewis for GoldSeek has reasons why the metals craze is bound to grow and ultimately impact prices:

• New Consumer Level Products. Firms are lining up to sell gold and silver coins on TV and in the news, and local coin shops are sold out. The number of companies wanting your unused gold and silver has exploded.
• Mid-Range Offerings. Wall Street knows that investors want to own gold and silver without physical delivery, so ETFs have taken center stage by offering easy exposure to the precious metals markets. [The ETFs are highly anticipated.]
• Buying makes sense. In the last decade, gold and silver soared more than 400% with nary a glance from most investors.
• New investing outlook. People are protecting their wealth while they grow it and in an effort to hedge against another “lost decade,” investors have found greater appeal and comfort in tangibles. [Why mining shares should also be supported.]
• A Normal Cycle. Historically, silver and gold have always represented wealth, and as hot stocks come and go, silver and gold remain ever-present and consistent. [Gold prices are going to keep climbing.]

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

• Market Vectors Gold Miners (NYSEArca: GDX)

• ETFS Gold Trust (NYSEArca: SGOL)

• iShares Silver Trust (NYSEArca: SLV)

• SPDR Gold Shares (NYSEArca: GLD)
  

The Dow Jones Industrial Average closed December with a loss of 0.4%. For the year, it was up 18.8%. The Nasdaq gained 4.3% in December and 43.9% for the year. The S&P 500 rose 0.6% for the month, and 23.5% for the year.

December was marked by some stabilization in both the U.S. dollar and gold prices. The dollar had been on a weakening trend for much of the year, but finally saw some revitalization this month. Gold prices soared to record highs in recent weeks, but took a step back in December as the dollar regained vigor. Heading into next year, the primary questions investors are asking will be: will the Federal Reserve hike rates? And if so, when and by how much? The answer could have a wide range of implications, particularly in the fixed-income space.

The top sectors in December were airlines, up 16.8%; natural gas, up 11.5%; semiconductors, up about 8%. The weakest performers this month were gold miners, down 14%; silver, down 11.9%; and Austria, down 10.4%.

To view our full December performance report, click here.

1. ETFs will grab more than their fair share of assets. As of mid-December, mutual funds were on a 39-week winning streak of net inflows that stood at a total of $389 billion, which amounts to about 4% of the nearly $11 trillion held in mutual funds. Net inflows for ETFs year-to-date in November stood at $87 billion, 11% of the total assets in ETFs. The mutual fund industry dwarfs the ETF industry, but ETFs can no longer be ignored as a “fringe” investment.

2. Hedge funds implode, and ETFs will explode. As of Dec. 21, 858 hedge funds shut their doors in 2009 while the number of new ones opening has slowed to far below the 1,400-per-year average seen in 2002-2007. As of November 2009, 66 new ETFs launched, but that number could likely be higher by year’s end.

3. All eyes will be on 401(k)s. There’s more attention being paid to this issue than ever before. Thanks to efforts by Darwin Abrahamson’s Invest n’ Retire, ING’s 401k plan ShareBuilder, iShares and others, ETFs are slowly but surely gaining entree into what could be a lucrative market for the industry. Small companies are also readily lining up to offer ETFs as an option in their 401(k)s. [401(k) plans, ETFs and you.]

4. Mutual funds players will realize ETFs are where it’s at. PIMCO has launched several funds [PIMCO getting started with ETFs.], and Schwab has launched its set of ETFs [Schwab's commission-free ETFs.]. T. Rowe Price, John Hancock and Putnam are gearing up to file ETFs of their own. The holdout remains Fidelity. The mutual fund giant standing firm and has stated that they have no intention of offering more than their single ETF that they currently offer. [Why Fidelity isn't playing the ETF game.]

5. Commodity ETFs will climb. There’s no other way to put it: assets in commodity ETFs exploded this year. In November 2009, long commodity ETFs had $73.3 billion in assets under management, up 136% since November 2008. Thanks to a global recovery and a weakened dollar, gold, oil and other commodities benefited. [Gold, oil and copper soar.] Commodity ETFs also saw a slew of new launches in 2009, despite some skittishness about potential Commodity Futures Trading Commission (CFTC) position limits in certain funds. [CFTC regulations prompt fee hikes.]

6. In recovery, small-caps and value will see action. Since the market’s March 9 low, value is up 78.5% compared to growth, which is up about 72%. Small-caps have also fared well since the market bottomed out: they’re up about 81% since the low, while large-caps are up 65%. The numbers across the board are good, but it reinforces the notion that in recoveries, small-caps and value tend to lead the way. [Is the time right for small-caps?]

7. Investors will wise up about fees. We called it – fees became more of a battleground than ever. Schwab’s ETFs were launched with commission-free trading at Schwab, and many believe that they won’t be the only ones to do so. Investors are getting smarter about their options and many have discovered that ETFs offer a low-cost, liquid, transparent option for them. [What are ETFs?] Fees are one of the several reasons that investors turned to ETFs this year – after all, the average actively managed mutual fund fee is 1.52%. Investors are beginning to understand the impact a few basis points can have over 30 or 40 years.

8. ETF provider competition will heat up. PIMCO and Schwab both entered the ETF game but that is only the tip of the iceberg. BlackRock bought iShares, Guggenheim bought Claymore, Jefferies Asset Management came out with some funds. Names that weren’t even on the radar a year ago are now players in the ETF industry.

9. ETFs will surpass $1 trillion in assets. In the United States, we were a little off. But at the end of November, global ETF assets stood at a whopping $1.1 trillion. U.S. ETF assets as of November stood at $751 billion – it’s an all-time record for the industry, but it’s not $1 trillion. Yet. [November ETF assets mark more records.]

10. Emerging markets bounce back. Did they ever! Since the market’s March 9 low, emerging markets have rebounded about 100% vs. the S&P 500’s 65% gain in that period. The assets poured in, too: as of November, assets in iShares MSCI Emerging Markets Index (NYSEArca: EEM) were up 94%; assets in Vanguard Emerging Markets Stock (NYSEArca: VWO) are up 54% in the same time frame. [Competition heats up in emerging market space.] ETF providers were quick to come out with new offerings targeting the space: Claymore and Global X have some single-country and China-focused sector funds, while Emerging Global Shares has a growing line of broad sector emerging market funds.

Max Chen contributed to this article.

The Internal Revenue Service views ownership of physical gold, other types of precious metals or any type of ETF backed by the precious metal as a collectible rather than an investment, comments Mark Biller for Sound Mind Investing. (How ETFs and ETNs are taxed).

How long you hold an investment or a collectible matters, too:

• Both investments and collectibles are taxed at the ordinary income rate if held less than 12 months
• Collectibles are taxed at 28% if held longer than 12 months

The IRS has also made an exception for IRAs holding gold and silver ETFs -  the standing rule states that IRAs can’t hold collectibles – and the money invested in the ETFs within an IRA aren’t subject to an early withdrawal penalty.

Precious metal ETFs are either backed by the actual metal or trade paper futures to approximate prices without owning the actual metal. For tax purposes, ETFs that aren’t backed by the metal are investments while “asset-backed” ETFs are considered collectibles. This is why it’s important to know what kind of ETF you’re holding, especially if you’re concerned with taxes. (Four types of commodity ETFs).

Furthermore, investors who own asset-backed ETFs own an “undivided interest in the actual metal that’s owned by the fund,” which means that if an ETF sells some hard assets to pay off costs, the gains or losses flow to the investor even if the investor doesn’t receive any distribution or cash. The result can be a K-1. (How to handle a K-1).

We are not tax experts and this should not be construed as advice. Investors should consult their tax professionals for additional details and information on how to proceed.

For more information on taxes, visit our tax category.

Max Chen contributed to this article.

Deutsche Bank Commodity Services is raising rates on seven of their PowerShares ETFs. If the CFTC were to enact position limits on ETFs that trade futures on various commodities, it could lead to higher costs for investors as providers find ways to come in under those limits. (What regulations could mean).

In August, DB said that the composition of some of its funds were being changed as a result of the CFTC ending their right to exceed limits on holdings in wheat and corn. As a result, PowerShares DB Agriculture (NYSEArca: DBA) had to change the number of commodities it owns from four to 11.

The hikes will also affect:

• PowerShares DB Commodity Tracking Index (NYSEArca: DBC)
• PowerShares DB Oil (NYSEArca: DBO)
• PowerShares DB Gold (NYSEArca: DGL)
• PowerShares DB Silver (NYSEArca: DBS)
• PowerShares DB U.S. Dollar Bullish (NYSEArca: UUP)
• PowerShares DB U.S. Dollar Bearish (NYSEArca: UDN)

The fees in DBA and DBC will rise from 0.75% to 0.85%. Fees in other ETFs will increase from 0.50% to 0.75%, reports Cinthia Murphy for Index Universe. (How commodity ETFs can get around regulations).

The new fees will take effect on Jan. 4.

ETFs are still, on average, cheaper than mutual funds, and these and other commodity ETFs remain an easy and cost-effective way to gain exposure. Fees are just one thing an investor should consider when it comes to shopping for ETFs – also important are trading volume, assets under management and whether the fund’s construction works for your individual goals. (Why individual investors are taking to ETFs).

For more stories about commodities and the CFTC regulations, visit our commodity ETF category.