Palladium bars
Palladium is more likely to outperform in 2012, given its stronger links to U.S. and Chinese demand. Illya Naymushin/Reuters

Palladium is likely to be the best-performing precious metal this year, Deutsche Bank said Friday.

The deteriorating global growth outlook has meant the underperformance of the platinum group metals relative to gold, although supply disruptions could provide some relief to weaker demand, the bank said, but palladium's strong links to the U.S. and Chinese economies could make palladium the big winner in 2012.

Investment demand fatigue was most acute for palladium last year, but some investors are expected to focus on palladium's relatively strong physical fundamentals once more as opposed to being a blanket precious metal proxy. The relatively low long position of non-commercial investors is bullish for the metal, Deutsche Bank analyst Grant Sporre said in a note.

Over half of the supply of palladium and its congener platinum goes into catalytic converters, which convert up to 90 percent of harmful gases from auto exhaust into less-harmful substances. The largest auto markets, China and the U.S., are gasoline dominant and therefore palladium intensive.

Chinese vehicle registrations are forecast to grow at a rate of 10 percent, despite the modest uptick of 2 percent to 3 percent shown in 2011. As of November, foreign branded vehicles were up 11 percent, domestic passenger cars up 5 percent and light commercial vehicles down 5 percent, Sporre said.

Sporre also said Deutsche Bank's auto team estimates that Chinese production capacity will grow by 4.3 million units in 2012, but that utilization will fall to approximately 82 percent.

Passenger vehicles sales is expected to be flat in 2012 at 13 million units, which factors in the possibility of a weak U.S. Gross Domestic Product environment of approximately 2 percent, as well as no improvement of auto sales as a percentage of GDP, which is currently running well below the average of 3.3 percent, according to Sporre.

Global economists at the bank are most bearish about Europe's GDP growth outlook, forecasting a 0.4 percent contraction for 2012. This is bearish for palladium, as Europe accounts for 22 percent of global palladium demand in 2011.

However, Sporre said the continued appetite for luxury European brands may well provide some upside for European production figures, although export volumes had tailed off during the latter part of 2011.

Downside risk scenario for palladium would be the continuing export of Russian stockpiles as similar levels to last year. If this were the case, then the palladium surplus would be approximately 450,000 troy ounces. But Sporre pointed out that the palladium market is still in a physical deficit, and is likely to remain so.