Lured by a relatively low price and cheaper investment costs, investors could well warm again to palladium, left in the cold by investors after market restrictions and price volatility in the early 2000s.
Palladium rose in March to its highest level since 2001, renewing investor confidence in the precious metal, and analysts say a bullish outlook for its sister metal, platinum, could help spark yet another rally.
Cash-rich investment funds could see palladium, used in car exhausts, jewellery and dental equipment, as an alternative to gold or platinum as both metals have hit lifetime highs.
I see potential in palladium. It is still far behind the value of platinum and gold, said Akira Doi, director at Daiichi Commodities Co Ltd.
As long as platinum is strong, palladium will be supported. Considering that it is well below its record highs, palladium could jump with fresh fundamentals, Doi said.
Palladium was quoted at $445 early on Wednesday, up more than 20 percent from the start of the year, after rising 10 percent in value in 2007.
At that price, palladium is still well below the seven-year high of $590 per ounce touched in March and about a third the value of its record peak of $1,150 set in January 2001.
Palladium's surge has been given a boost and would continue to be well supported by platinum's strength, traders said.
Platinum hit record highs this year after a power crisis stopped mining in South Africa, the world's biggest producer, raising fears of a widening supply deficit and sparking speculative buying.
Platinum, which soared to a record high of $2,290 an ounce in March, is up more than 50 percent this year and was up more than 30 percent in 2007. On Tuesday, it was at $2,144 an ounce.
Fundamentals appear to favour platinum. Last year, Johnson Matthey said the platinum market fell to a deficit of 480,000 ounces in 2007, from a surplus of 355,000 ounces in 2006.
Traders say palladium has room to rise further because it is still a long way from its record high.
Many commodities have hit record highs, but there aren't many like palladium which is still far away from its record, said Hisaaki Tasaka, market analyst at Ace Koeki.
Demand for the platinum group metals (PGMs), including palladium and rhodium, which is used in catalytic converters, has been boosted by tighter regulations on carbon emissions from vehicle exhausts. The boom in China and India's car industry is yet another bright spot.
Despite palladium's large surplus last year, demand in Japan rose 3.4 percent to 1.525 million ounce in 2007.
Cheaper trading margins of palladium futures on the Tokyo Commodity Exchange, the world's largest futures trading centre of palladium and platinum, also attracts buying interest.
The initial margin for palladium is 60,000 yen ($575) per contract. That's 60 percent lower than platinum and 56 percent lower than gold.
Open interest, or the number of outstanding contracts, in TOCOM platinum has risen 81 percent from the start of the year to 17,919 contracts.
But traders say they have had their fingers burnt by palladium in the past.
In February 2000, TOCOM halted trading in palladium futures after prices of the metal soared amid unstable supply from Russia, which produces two-thirds of world supply.
Though trading in palladium partially resumed in April that year, the restrictions were not fully removed until 2001.
Traders said the incident had shattered investors' faith in palladium, and this has been a factor behind the market's stagnation over the years.
I don't trust the rally in 2000-2001 as it was largely done by speculative force, said Shuji Sugata, manager Mitsubishi Corp Futures and Securities Ltd. People who have experienced this may not want to touch it unless they find a distinct buy factor.
(Editing by Ben Tan)
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