So far as I know, it's simply not possible. X11 doesn't include an alpha channel, and thus doesn't allow for true transparency of objects.
However, many terminals are capable of something hackily similar; they set their background to be the appropriate subset of the desktop pattern, possibly including some shading. This looks somewhat similar to true transparency, but you can't see windows which are stacked behind the terminal, only the desktop image itself.
Venerable xterm itself doesn't have this capability. At least Eterm, aterm, wterm, and rxvt do, I believe. Their man pages will happily explain how to invoke them with psuedotransparency enabled.
