Hedge funds are siding with analysts predicting decade-high palladium prices even as investors cut holdings in exchange-traded products backed by this year’s worst-performing precious metal.

The funds’ wagers on a rally more than doubled since August as ETP holdings slumped to a seven-month low this month, data compiled by Bloomberg show. Prices for the metal used mostly in catalytic converters will average $800 an ounce in the third quarter, 35 percent more than now and the highest since 2001, based on the median of 13 analyst estimates.

Annual Shortage

Palladium is retreating for a second year and traded at $594.50 today. Gold gained 9.5 percent and silver 15 percent since the start of January. The Standard & Poor’s GSCI gauge of 24 commodities fell 1.2 percent and the MSCI All-Country World Index (MXWD) of equities gained 9.7 percent. Treasuries returned 1.9 percent, a Bank of America Corp. index shows.

Demand will rise 1.4 percent to 9.67 million ounces next year, the second-highest ever, as supply gains 3.2 percent to 9.59 million ounces, Barclays Plc estimates. Morgan Stanley is also predicting a second consecutive annual shortage in 2013.

That may grow as South African strikes spread. Police shot 34 protestors at Lonmin Plc’s Marikana mine on Aug. 16 amid the worst violence in the mining industry since the end of apartheid in 1991. The country produces 75 percent of the world’s platinum and 35 percent of its palladium. AngloGold Ashanti Ltd. and Gold Fields Ltd. began firing more than 20,000 workers this month as ultimatums passed for employees to return for duty.

The Federal Reserve said Sept. 13 it will buy $40 billion of mortgage debt a month and central banks in Europe and Japan have also pledged to buy more assets. China, the biggest palladium user, approved a $158 billion subways-to-roads construction plan. The nation’s growth will accelerate in this and the next three quarters, after slowing since the start of 2011, based on the median of as many as 31 economist estimates compiled by Bloomberg.

Central Banks

The central bank stimulus may bolster demand for cars, which account for 40 percent of platinum demand and 66 percent of palladium consumption. Worldwide sales of cars and light commercial vehicles will rise 5.3 percent to a record 85.3 million units next year, according to LMC Automotive Ltd., a research company in Oxford, England.

Hedge funds and other large speculators held a net-long position of 7,723 palladium futures and options by Oct. 23, U.S. Commodity Futures Trading Commission data show. While that’s down from 10,536 contracts on Oct. 9, the most since March, it compares with 2,436 contracts held in May, the least according to data compiled by Bloomberg going back to December 2009.

That reversal has yet to be reflected in ETPs, which fell 4.2 percent to 59.5 metric tons valued at $1.14 billion since mid-June. They rose for the first time since September yesterday. Holdings in platinum products jumped 12 percent, those in silver expanded 5.1 percent and gold rose 8.7 percent since mid-June, data compiled by Bloomberg show.

World War

The drop in palladium reflected mounting concern about growth. Demand contracted in 2008 and 2009 as the global economy endured its deepest slump since World War II. The International Monetary Fund cut its forecast for next year to 3.6 percent from 3.9 percent on Oct. 9. The 17-nation euro area will contract 0.4 percent in 2012, the Washington-based group estimates.

“If we see another recession, or if growth rates won’t be as high as forecasts are, you could see smaller demand,” said Thorsten Proettel, an analyst at Landesbank Baden Wuerttemberg in Stuttgart, Germany. “We’ll need more demand or supply interruptions for higher prices and I wouldn’t expect both for the next year.”

While analysts expect another year of shortages in 2013, it will be smaller than in 2012, with Barclays predicting a narrowing to 78,000 ounces from 234,000 ounces. There may be 6 million to 9 million ounces stockpiled globally, according to Standard Bank Plc, with the higher figure equal to almost 16 months of mine production.

Norilsk Nickel

About 150,000 to 200,000 ounces of palladium production may be lost this year because of unrest in South Africa, as well as 300,000 to 400,000 ounces of platinum, said Anton Berlin, deputy chief executive officer of the sales unit of OAO GMK Norilsk Nickel. The Moscow-based company is the world’s biggest palladium producer.

Sales from Russian state stockpiles, which reached 1 million ounces as recently as 2010, will decline to 150,000 ounces next year, Barclays estimates. The reserves, a state secret, are probably almost depleted, according to London-based Johnson Matthey Plc, the maker of one in three autocatalysts.

Palladium is trading 47 percent below its 2001 record of $1,125 and 62 percent below the price of platinum. That’s spurring carmakers to use more in autocatalysts, canisters that have honeycomb-like surfaces converting emissions into less harmful substances. Palladium accounted for about 30 percent of the metal in catalytic converters for diesel vehicles last year, from 20 percent in 2009, Johnson Matthey estimates.

Rhodium Market

Rhodium, another precious metal used in autocatalysts, fell 20 percent this year to $1,125 an ounce, Johnson Matthey data show. The rhodium market is about 10 percent of the size of palladium, based on demand. Deutsche Bank AG introduced ETPs backed by rhodium in May 2011 and they now hold 46,900 ounces valued at about $50 million, according to data from the Frankfurt-based bank.

Carmakers will use a record 6.54 million ounces of palladium next year, Barclays estimates. Demand from other industrial applications including dental, electrical and glass manufacturing will rise 3.7 percent to 2.64 million ounces, the bank predicts.

Norilsk Nickel

Shares of Norilsk Nickel fell 3.3 percent this year and will gain 24 percent to 5,951 rubles ($189) in the next 12 months, according to the average of 10 analyst forecasts compiled by Bloomberg. The company will report a 7.9 percent gain in profit to $3.24 billion in 2013, the mean of five estimates shows.

“If you are a little bit more long-term orientated and not just focused on the next two or three months, then it is a good buying opportunity,” said Daniel Briesemann, a commodities analyst at Commerzbank AG in Frankfurt. “Lower supply from Russia and recovering demand from the auto industry in at least Asia and America should be the main driving factors behind rising prices.”

To contact the reporters on this story: Nicholas Larkin in London at [email protected]; Debarati Roy in New York at [email protected].

To contact the editor responsible for this story: Claudia Carpenter at [email protected].

Source: http://www.bloomberg.com/news/2012-10-30/hedge-funds-returning-to-palladium-as-etps-retreat-commodities.html