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PALLADIUM, OFTEN OVERSHADOWED BY FLASHIER precious metals like gold and platinum, could end up being this year's star performer. Palladium hit a 15-month high Nov. 18 and has more than doubled since the end of 2008, largely driven by overspill momentum from gold's rally; commodities in general have benefited from huge investor inflows to the sector and a weak U.S. dollar. Palladium settled at $358 an ounce Friday, off just 0.6% on the week.

True, demand for the metal has taken some hits as the auto industry has struggled; more than half the world's annual palladium output goes into catalytic converters, which filter pollutants out of exhaust emissions.

But palladium has an unusual wild card: secret Russian stockpiles -- which could be nearing their end, and which would lend further price support.

Back in the days of the Soviet Union, Moscow surreptitiously stockpiled palladium so that it could sell off its hoard when supplies ran out elsewhere. Even now, Russia, the largest producer of the metal, won't reveal the size of its inventory, but outside estimates suggest that the stores could be nearly empty. Industry specialist Johnson Matthey predicts that Russia will sell 960,000 troy ounces of palladium from the stockpiles in 2009, similar to the amount sold last year. But "from 2011, stock sales from Russia should decline significantly," says Peter Duncan, the company's general manager.

EXCLUDING SALES FROM STOCKPILES, and despite a 3.8% drop in demand, the market is in deficit. But when Russian sales are included, palladium will be in a surplus of 655,000 troy ounces this year, and total supplies will be down just 1.8%, Johnson Matthey says.

Warns Stephen Briggs, an analyst at RBS Global Banking & Markets in London: "We're looking at a genuine tight market going forward. There is the extra risk in the price with Russian stockpiles, which is not an issue for metals like silver." On top of that, palladium demand is forecast to rise next year, assuming that demand for autos does, too. "The [auto] situation was so bad at times this year, it's impossible not to see some improvement in 2010," maintains Peter Ryan, a senior consultant at GFMS.

Palladium is used mostly in catalytic converters for gasoline-engine cars, while platinum is the primary metal in diesel catalysts. Worldwide, sales of smaller gas-powered cars have done better than those of larger diesel vehicles during the economic downturn. As a result, platinum demand from car makers will end up being down by a third this year, whereas palladium will fare better, dipping by only 12.7%.

Along with improving light-vehicle sales, more palladium will be used in the diesel sector, Johnson Matthey predicts.

Investors' demand for the metal is also up. Holdings in exchange-traded funds have almost doubled since the start of the year, to more than a million ounces, as the dollar fell and gold bolted to new highs.

But GFMS's Ryan says that, in five years or so, palladium demand will be accelerating too, just as supplies are stalling. So, while prices have moved up, another shining opportunity is ahead in this oft-overlooked metal.

COMEX DECEMBER GOLD, despite a slight setback Friday on Dubai debt worries and a stronger dollar, posted a 2.4% weekly gain, ending at $1,174.20 an ounce.

DEVON MAYLIE is a reporter for Dow Jones Newswires in London.