Editor's Note: Prices for many precious and base metals hit record highs in 2010, as economic uncertainty rattled around the globe. What does 2011 hold for gold, silver, platinum, palladium, copper and other metals? Kitco News reporters have prepared a series of stories which examine what is in store for 2011, not only for metals but for currencies, stocks and the overall economy: 2011 Precious Metals Outlook

(Kitco News) - Palladium was a star performer in 2010, lifted by the gradual recovery of the automotive sector and heightened investment interest in the metal, and those factors should spill over to underpin it in 2011.

Further, the supply situation for the platinum group metal is far from certain, and this will be another lift for prices.

Palladium futures prices on the New York Mercantile Exchange gained about 85% this year, with values currently hovering around $750 an ounce. Market watchers said that level could easily be an average price for the first quarter of 2011.

A big factor driving prices for many precious metals in 2010 was the advent of exchange-traded funds. A palladium ETF for U.S. investors was launched in January. This allowed investment demand in the white metal to soar, aside from a dip in demand this summer which affected many markets. The investment vehicle tracks the price of palladium, with the open-ended fund backed by physical palladium bars stored in secure vaults.

By the first week of December holdings reached 2.05 million ounces. Comparatively, annual global mine supply of palladium is just 6 million ounces, prompting analysts to suggest that investment demand is looking increasingly likely to push the metal’s supply into deficit in 2011.

Johnson Matthey director Mark Bedford said that the anticipated increase in investment demand for the metal was likely to come from North America and that many investors still believed the metal to be undervalued.

Two new physically backed palladium funds, launched this year in Germany and Japan, have seen limited investment thus far, Bedford said, adding that he did not expect much of an increase in interest in these funds until later in 2011.

In addition to investment demand, end-user demand will continue from the automotive industry, which is revving back up after a sharp drop in consumer purchases following the credit crisis and global economic recession. Sales in Asia are taking off, and in the U.S., light vehicle sales for November showed the 11th increase in the past 12 months. Cumulative sales to November were 11% higher than in the first 11 months in 2009.

Standard Bank’s Walter de Wet said that global light vehicle growth is seen at 50% a year up until 2016, boding well for palladium, which is used to make catalytic converters.  He also said given the strong U.S. auto sales to November “we expect a strong December for US auto sales.”

Johnson Matthey has predicted a 15% increase in gross demand for the metal in 2011, with an expected 1.10 million ounce increase from automotive demand. The firm said that new car sales were expected to increase in 2011, with a large proportion of increased demand coming from China. Demand for palladium in Chinese autocatalysts is set to rise by 36% to 930,000 ounces. The company’s analysts say that a supportive credit environment in for Chinese customers coupled with more stringent emissions legislation introduced earlier this year, will support palladium demand in autocatalysts from China into 2011.

Other industrial uses of palladium should increase, too, analysts said, chiefly in the electrical and dental sectors. Consumer demand has for electronics has hiked that demand 11% over the past year to 1.41 million oz according to Johnson Matthey, with further increases in demand expected in 2011.

Supplies Dwindling As Demand Picks Up

The voracious, new appetite for palladium from the investor sector is coming at a time when supplies of the white metal have become uncertain.

Russian supplies- which are responsible for over 50% of world’s reserves – are in flux. There’s speculation that Russia’s palladium stockpiles have dwindled, especially after comments in October from Russian mining major Norilsk Nickel that 2010 would be the last year when any significant amount of the metal would be sold on the open market. In December the company said there would be “insignificant” palladium releases from Russian state stocks in 2011 but that this supply would be depleted by 2012.

Norlisk is the world’s largest producer of the metal and Gokhran, the Russian precious metals and gemstones repository, have been sitting on large, state-owned stockpiles of palladium since the 1970s which have since been sold back to the market sporadically. The comments from Norlisk’s regarding future sales have led to speculation those big reserves have vanished.

If Russia’s palladium stockpiles have indeed been exhausted, growing global demand for the metal will depend increasingly on mine supply. Norilsk, which has published projected output figures up to 2025, is not planning to make any huge increases to its palladium production.

Miners in South Africa, one of the only other major palladium producing counties in the world, have said they plan to increase palladium production in 2011, but putting a greater emphasis on palladium mining over platinum mining may not prove financially viable, with platinum sold at over twice the price of palladium.

This could mean a potential supply deficit for 2011. Analysts at French investment bank Societe Generale is forecasting a fundamental, pre-investment palladium surplus of just 110,000 ounce after taking account of Russian movements in inventory, noting that ETF investors have already had to entice roughly 700,000 ounces of metal out of the hands of other holders.

“If ETF investors have taken this much metal then Over the Counter investors must be assumed to have taken up similar amounts,” said the bank, “driving the market into a sizeable overall deficit.”

Because of the twin pulls of lower supply and higher demand, Standard Bank is forecasting a first quarter average price of $780 an ounce.

Societe Generale is positive on the metal, predicted a first quarter average price for the metal of $800, but warned that the white metal had been over bought and a correction could be expected.

By Michelle Madsen Contributing to Kitco News

2011 Precious Metals Outlook

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