The surge in the price of palladium over the last few months is more a result of speculative buying by hedge funds than increased demand in the marketplace.

That's the view of Jeremy Coombes, general manager for marketing at Johnson Matthey, who suggested the interest in palladium was driven by a belief amongst fund managers that palladium will increasingly be used as a substitute for its more expensive sister metal platinum in the production of autocatalysts.

In an interview with OsterDowJones, Mr Coombes stated: "We haven't seen serious changes in palladium demand. I think it's funds.

"That interest has probably been growing as they [hedge funds] think palladium has some definite upside due to lower prices and a possible switch in the autocatalyst industry."

He continued: "To the trading mind, there must be an opportunity there."

Spot palladium peaked at $290 a troy ounce earlier this week, which is nearly 50 per cent up from its price at the end of 2003 ($193.50/oz).

Unlike palladium, which was oversupplied by 670,000 ounces last year, gains in the price of platinum can be traced to a shortfall in supply, in addition to fund buying, according to Mr Coombes.

Platinum now stands around the $900/oz mark - also near a multi-year high.

While refusing to speculate on palladium and platinum growth rate projections for 2004 ahead of Johnson Matthey's publication of its Platinum 2004 annual supply and demand outlook in May, Mr Coombes committed to predicting that both platinum and palladium may see "modest growth" in demand within the autocatalyst industry.

Apart from growth in the autocatalyst sector, palladium use is likely to decline in other sectors such as the electronics industry, which will probably turn to cheaper alternatives such as nickel.