Palladium hits high on supply crunch bets Palladium prices rose to a 16-month high above $750 a troy ounce on Wednesday as bullish hedge funds drive the precious metal higher. Palladium, which is mainly used in catalytic converters that scrub car exhausts, is a niche metal little-known outside the precious metals industry. But it has become a darling of hedge funds this year, as they anticipate that a sharp decline in supplies could drive prices higher. Since November, palladium prices on the spot market have risen 26 per cent. The metal on Wednesday rose 1.3 per cent to a high of $757.22 - a level last seen in September 2011. "Palladium is one of our favourite picks among the metals over the long term," Tiberius Asset Management, a Swiss commodities fund manager, said in a monthly commentary this week, saying that the metal was one of "only a handful of industrial commodities" facing a sustained market deficit, along with platinum, tin and lead. Expectations of a supply crunch in palladium have been buoyed by the unrest in the South African mining industry. While South Africa is not as significant a producer of palladium as it is of its sister metal platinum, the country still accounts for more than a third of mine production. Moreover, the market is facing the loss of a significant source of supply. There is a growing consensus among analysts and traders that the Russian government's stockpile is now all but depleted. Johnson Matthey, the precious metals refiner that produces benchmark supply and demand data on the platinum and palladium markets, has said it believes Russian stock sales will be about 100,000 ounces this year - down from the roughly 1m ounces a year Moscow sold for much of the past decade. Total palladium supply last year was about 6.5m ounces. "Russian state stockpiles have been dwindling and are now pretty much exhausted," said Peter Duncan, general manager of market research. Although prices were lacklustre for much of last year as weak global growth weighed on the market, investors have returned en masse in recent months. The Commodity Futures Trading Commission's most recent report on investor positioning showed speculators had raised their bullish bets on the metal by 12 per cent last week to the highest on record, according to Joni Teves of UBS. That has raised fears among some that the market could be primed for a sell-off, despite its bullish backdrop. "The market is starting to show signs of strain again," said Standard Bank in a recent report. Russia accumulated a vast store of palladium over 50 years in the middle of the last century when it was mined as a byproduct for which little use could be found. Demand has surged in the past two decades as the auto industry is buying ever larger quantities and Russia has been selling its metal.