Tokyo - Palladium rose to its strongest in 17 months on Wednesday due to a robust outlook for demand and concerns over supply, while gold inched down, although purchases by jewellers after the Lunar New Year break limited losses.
Palladium and its sister metal, platinum, have outperformed gold so far this year on an improving global economy and after mining disruptions in South Africa, as well as a drop in supply from Russia, triggered fears of a deficit in the metals used in jewellery and auto catalysts.
Spot palladium also got a boost from the most active palladium contract on the Tokyo Commodity Exchange (TOCOM),currently December, which rallied to its highest since mid-2001 at ¥2.334 a gram.
Palladium rose to $772.25 an ounce, its strongest since September 2011, before easing to $768.22 by 09:21, little changed from the previous session.
Platinum gained $2.18 to $1,715.67 an ounce, still within sight of a 17-month peak struck last week.
"I think that behind the rally in palladium lies the air pollution problem in Beijing. Now that the world is aware of the problem, China may have to step up its regulations on auto exhaust gas," said Yasukazu Kyomoto, a manager at Japanese commodity brokerage Yutaka Shoji Co.
"If so, that would boost demand for auto catalyst and based on such speculation, money from funds is flowing in. Unlike in Europe, both palladium and platinum can be used in auto catalysts in China. People are now being lured to palladium, which looks undervalued versus platinum."
Excessive pollution levels have prompted the Beijing government to roll out a series of temporary emergency measures, such as shutting down around 100 heavily polluting factories and taking 30% of government vehicles off roads.
Spot gold fell $1.40 an ounce to $1 649.00 after rising as high as $1 653.20.
US gold was little changed at $1,649.40 an ounce.
"Technically the metal appears susceptible to a move lower, perhaps to the $1 600 an ounce level or even $1 550 an ounce," Deutsche Bank said in a report.
"There is a distinct lack of obvious positive catalysts for gold at the moment, with the current environment seemingly bereft of macro concerns."
The euro hardly moved against the dollar, while the yen held firm, having swung higher in dramatic style as investors cut bearish positions after an official from the Group of Seven said there were concerns about excessive movements in Japan's currency.
"We are seeing some good physical requests. Indonesia is buying and there's interest from Thailand, which bought a fair bit of gold last night,
"I would say there's still good buying around, but I haven't seen demand from India yet. The premiums for gold bars are unchanged at $1.20."said a physical dealer in Singapore.
After a 50% import duty hike to 6% last month, the Reserve Bank of India has recommended putting curbs on imports, along with launching gold-linked products to limit shipments.
The wedding and festival season are underway in India, the world's top gold consumer, with jewellery a key part of celebrations.
Most markets in Asia have reopened after the Lunar New Year holiday, although China will remain closed all week.