We believe palladium prices are largely depending on the auto markets of China and India. Auto-industry usage will increase as catalytic-converter manufacturers accept the metal over platinum because of its lower price. China and India now drive auto sales across the globe and with the increase in car sales, platinum and palladium demand is also expected to rise. Both these metals are used in catalytic converter applications in automobiles.

China’s automobile sales surged 30.45% in the first half of the year, keeping China the world’s largest auto market. This means, they will continue to produce more autos in China, which in turn will lift the demand for palladium and platinum.

In India, carmakers are not slowing down as sales continued to boom in June, riding on high domestic demand and new launches. Tata Motors led with a 63% jump in passenger car sales in June that helped it overtake Hyundai Motors as the second-largest player in the domestic market.

“Palladium will rise to its highest in a decade amid increased demand from carmakers and depleted Russian stockpiles”, said Stillwater Mining Co., a U.S. producer of the precious metal. Russian palladium stockpiles accumulated during the Cold War have now been depleted. Palladium last traded at $700 or higher in April 2001.

Up until the mid to late 1990's, when auto manufacturers began to substitute Palladium for Platinum, Platinum had traded consistently at twice the cost of Palladium. However, with the Platinum price moving up, it made economic sense to adjust the composition of the catalytic converters in favor of the lower-cost but less-efficient sister - Palladium.

Auto manufacturers believed they could count on consistent supplies of Palladium coming into the market. That belief was unfounded.

In 2002, Russia supplied approximately 43% of the world’s palladium, South Africa 37%, and North America 16%. Russia controls the world’s Palladium supplies. When they halted supplies due to bureaucratic wrangling over export quotas it was felt all over, but nowhere as much as the auto industry. When the world's largest supplier of a commodity simply stops shipping that commodity, the price will rise quickly.

This is exactly what happened in 2000 with Palladium. Conversely, when Russia resumed shipments, and the auto manufacturers reverted (after some time and expense) to Platinum, the price fell even more rapidly than it rose.

We highly recommend allocating assets to your core holdings before getting on the palladium rollercoaster. It is a volatile market, however, in the year 2010 palladium out-performed the other three precious metals – gaining 87%.