The recent news that Euro zone economy is slowly gaining strength has helped platinum and palladium prices show signs of recovery.

According to reports platinum prices may rise as gradual economic recovery will lead to increased demand for the auto-catalyst metal, but some of the euphoria that lifted forecasts earlier this year has evaporated after a hefty correction in May.

Platinum is now seen averaging $1,600 an ounce in 2010. While platinum bulls are pinning their hopes on expectations for an economic recovery, some caution remains after a spate of gloomy US data. Prices slid in May as recovery hopes faded and fears of a double dip recession came to the fore.

Analysts expect to see broad global economic growth lifting car sales, in turn raising demand for platinum and its sister metal palladium.

Prices are expected to average $1,580 an ounce in the third quarter, rising to $1,630 in the last three months of the year. Spot platinum was trading just above $1,500 an ounce this week. In 2011, the median platinum price forecast climbed to $1,700 an ounce. Platinum prices rose 19 percent in the first four months of the year, but failed to hold onto those early gains.

Palladium prices are seen averaging $472 an ounce this year, up from a January forecast of $434 an ounce. In the third quarter prices are expected to average $460 an ounce - above their current level of around $445 - with forecasts rising to $494 an ounce for the fourth quarter.

Palladium strongly outperformed other precious metals in the first quarter, rising 17.6 per cent against gold's 1.6 percent and silver's 3.9 per cent. It fell 7.4 per cent in the second quarter, but remains up 14.7 per cent year-on-year.

In 2011, palladium is expected to average $519 an ounce, up from a January forecast of $480 an ounce.

Meanwhile, German investment bank Commerbank lowered their third quarter price outlook for platinum and palladium due to lack of supply disruptions in South Africa during the World Cup.

South Africa is by far the largest platinum producer, with 79% of global mining supply, and the second largest supplier of palladium, with 35% of the global market. Russia is the largest producer of palladium.

As the loss of supply could not have been compensated by other sources, production losses at South Africa's platinum and palladium mines would have had a substantial impact on prices.

Moreover, the automobile sector is showing signs of slowing. New car registrations in Europe dropped in June by 6.9%, year-on-year. There are also signs of slowing growth dynamics in China, the largest growth market, analysts noted.

Chinese car sales rose in June at their slowest pace in 15 months. The slowed growth is especially relevant for palladium, since over 60% of demand comes from the automotive sector. As with gasoline-powered vehicles in the US, Chinese vehicles have catalytic converters using mostly palladium.

However, platinum prices could gain support from new problems on the supply front, analysts said. The South African government has recently introduced new safety measures for mines in the northwest of the country, meaning it will no longer be possible to mine the same quantities of ore.

Most of South Africa's platinum mines are located in the northwest region. Platinum is also becoming more popular as jewelry.