May 21 (Bloomberg) -- From Ford Motor Co. to Fortunoff to Schroders Plc, the demand for palladium is increasing fast enough to outstrip the supply and make it this year's best investment among precious metals.

Sales will rise 6.5 percent in 2007, according to precious metals consultant CPM Group, after Ford, General Motors Corp. and other automakers used 32 percent more palladium in car- exhaust systems the past five years. Fortunoff started selling palladium wedding bands in November and says the metal already represents 10 percent of the market.

Supplies of palladium are declining because Russia, the producer of about half of the global supply, will slash exports for the second straight year, according to Johnson Matthey Plc, the largest marketer of the metal. Palladium may jump 37 percent to $500 an ounce by yearend, says Gerry Schubert, a director of metals in London at Fortis, Belgium's biggest bank.

``We're positive long-term on palladium,'' said Christopher Wyke, commodities product manager in London at Schroders, the money manager with $1 billion invested in commodities including palladium. ``There's very few new sources of supply coming in the market, and the demand is growing.''

Speculators have amassed a record bet in New York palladium futures, holding a net 11,873 contracts as of May 8, six times more than at the start of the year, according to the Commodity Futures Trading Commission in Washington. The total slipped to 10,665 as of May 15, the data show.

It doesn't hurt that palladium is the second-worst investment among precious metals after gold in the past 12 months. Palladium is up 7.9 percent this year and contracts for June delivery of the metal rose $4.85, or 1.4 percent, to $365.25 an ounce on the New York Mercantile Exchange on May 18.

Caxton, Citadel Buy

Bruce Kovner's Caxton Associates LLC of New York and Kenneth Griffin's Citadel Investment Group LLC in Chicago both are investing through stakes in Stillwater Mining Co., the only U.S. producer of palladium and platinum. A Caxton spokesman didn't respond to requests for comment and a Citadel spokesman declined to comment.

``People believe that the palladium market is in balance, and they're looking for demand to move from platinum and rhodium to palladium,'' said Francis McAllister, chief executive officer of Stillwater Mining, based in Billings, Montana. ``As that move progresses, the market may well have a shortage.''

Palladium has fallen 66 percent from a record $1,090 in January 2001, when Russia stopped exports, a decision that culminated in a $1 billion loss at Ford. The Dearborn, Michigan- based carmaker at that time used forward and option contracts to lock in its palladium costs on concern prices would climb for the 1.5 million ounces it used in North America. Prices plunged 72 percent by October 2001 to $305, creating the loss.

Robertson Profits

Hedge-fund manager Julian Robertson controlled an estimated 1.5 million ounces of palladium, or a quarter of the world's supply, at the time. He profited using palladium options contracts as the price of the metal climbed from about $200 in 1998 to more than $1,000 in 2001. Robertson doesn't own any now, Tiger spokesman Fraser Seitel said.

Carmakers use the metal to meet government restrictions on automotive exhausts. Umicore SA, the Brussels-based metals company, developed palladium-based pollution-control devices for diesel cars in 2004. The metal wasn't used for diesel-powered cars until last year, Johnson Matthey said.

`Guys in White Coats'

Palladium in so-called catalytic converters rose 3.9 percent in 2006 to 4.02 million ounces, while platinum consumption increased 11 percent to 4.2 million ounces, according to Johnson Matthey. Palladium is now a cheaper alternative.

``There are guys in white coats who are always trying to raise the amount of palladium that can be used,'' said Cara Geffen, a fund manager at Investec Asset Management in Cape Town. ``Diesel catalysts are predominantly platinum based. The physical properties of platinum far outstrip palladium. Twenty- five percent substitution of platinum is the cap.''

Brides and grooms are also seeking an alternative to platinum. North American jewelers doubled the use of the metal last year to 40,000 ounces, and European sales increased for the first year in at least a decade, according to Johnson Matthey.

More gains are likely, said Ruth Fortunoff, vice president of jewelry merchandising at Fortunoff.

Saving Money

``We definitely expect the sales to keep increasing,'' she said. ``People don't come asking for palladium, but when they become more educated about the pricing and about the metal, they are sold on it.'' The average palladium band is about half the price of a $1,200 platinum ring.

The rising demand is benefiting OAO GMK Norilsk Nickel of Russia, the world's largest palladium producer, and Russian President Vladimir Putin, whose government controls the nation's exports through annual licenses. Russian exports of the metal last year were 33 percent below their 1998 peak.

Russia's supplies of palladium last year, which Johnson Matthey estimates at 3.9 million ounces, outstripped the 2.95 million ounces from South Africa. North America supplied 985,000 ounces and Zimbabwe mined 142,000 ounces.

Russia's central bank also holds an undisclosed amount of palladium. The figure has been a state secret since the days of the Soviet Union. Those inventories probably total 5 million to 10 million ounces, according to Derek Engelbrecht, the marketing director of Johannesburg-based Impala Platinum Holdings Ltd., the world's second-largest platinum producer.

Another stockpile of 6 million to 8 million ounces is held at banks in Zurich and may still be owned by Russia's central bank, Engelbrecht said, whose estimates are based on Swiss import and export data.

The Gulag

The world's largest known deposits of palladium are located above the Arctic Circle in northern Siberia's Taimyr Peninsula. The region was known for its copper deposits since the 1600s. Development of the mine began in the 1930s, with the creation of Joseph Stalin's forced labor gulag system.

Production started in 1939, slave workers gave way to paid labor in the 1950s, and, in 1993, the state production company was transformed into Norilsk Nickel, a company that was later sold to private investors.

Platinum and palladium are mined together from underground deposits that usually also contain gold, nickel and copper. Almost all of the world's reserves lie in South Africa, Finland, Russia and Zimbabwe, with small fields in the U.S., China and Canada.

Putin's Control

The Russian government has always controlled the export of palladium and platinum and until this year used a quota system. A decree by Putin annulled the quotas on Jan. 15, while leaving in place another Soviet-era restriction that requires Norilsk to export through state-owned trader Almazjuvelirexport. The palladium-export license expires in 2009.

Restrictions on the supply of palladium have made the metal a favorite among hedge funds. The speculative long positions, or bets prices will rise, in palladium are larger than in platinum, which has gained 16 percent in price since the end of last year, or more than twice as much.

``Platinum has been go, go, go,'' said Stuart Flerlage, who helps manage more than $600 million at NuWave Investment Corp. in New York, including investments in platinum and palladium. ``We could see the same in palladium.''

The creation of exchange-traded funds linked to the price of platinum will spur demand for that metal and encourage more manufacturers and jewelers to use palladium as a cheaper alternative, Michael Gambardella, an analyst at JPMorgan Chase & Co. in New York, wrote in a May 11 report.

`More Cost-Effective'

``We expect a bigger move to the more cost-effective palladium and improved prices of the metal,'' Gambardella said. ``We expect palladium to catch up on the large gap of around $947 an ounce between the two metals.''

Securities introduced by ETF Securities Ltd. on April 24 attracted investments equal to 18,000 ounces of palladium and 12,000 ounces of platinum in the first three weeks, said Nik Bienkowski, head of listings at ETF Securities in London. ETF Securities, which has developed 31 commodity-linked securities since 2005, also introduced units backed by silver, gold and a basket of the metals.

The new funds will add $250 million to $500 million of demand for all the precious metals, Graham Tuckwell, chairman of ETF Securities, said April 23. That compares with $700 million that's been invested in the existing 31 commodity-linked products, he said.

``We like the outlook for the platinum-group metals, supported by very strong underlying consumption of the metals and the challenges for the industry in being able to grow supply,'' said Evy Hambro, who helps manage $31 billion of natural-resource equities in London at BlackRock Investment Management.

To contact the reporters on this story: Millie Munshi in New York at mmunshi@bloomberg.net; Claudia Carpenter in London at ccarpenter2@bloomberg.net.

Last Updated: May 21, 2007 04:12 EDT