By Zandi Shabalala
LONDON (Reuters) - Strong speculative demand kept palladium near 16-years highs on Monday, but weak fundamentals are expected to soon take their toll on prices of the metal used to make autocatalysts for gasoline-fuelled cars.
Meanwhile, gold rose ahead of a U.S. Federal Reserve policy meeting on Tuesday and Wednesday that is expected to yield clues to the timing and magnitude of future interest rate increases.
Spot gold was up 0.2 percent at $1,268.81 an ounce at 1153 GMT, after shedding one percent on Friday, its biggest one-day percentage fall since May 18. U.S. gold futures fell 0.1 percent to $1,270.10 an ounce.
Palladium gained 0.5 percent to $894.50 after rising above $910 an ounce on Friday, its highest since 2001.
"It seems to be speculators driving the price higher," said Robin Bhar, head of metals research at Societe Generale, adding there was a shortage of metal for immediate delivery.
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That shortage has created a premium or backwardation of around $6 and $21 dollars an ounce for the June and July futures respectively over the August contract.
But analysts say declining car sales in China and the United States point to weaker demand for palladium.
"The palladium market is experiencing a short-squeeze which we believe is driven by investment demand rather than industrial demand," said Julius Baer analyst Carsten Menke.
"Eventually, the weaker demand backdrop from automotive catalysts should be reflected in deteriorating sentiment and falling prices. We remain bearish."
However, the palladium market is expected to see a deficit of 792,000 ounces in 2017 from 163,000 ounces this year, Johnson Matthey said. Total palladium demand is estimated at more than 10 million ounces this year.
"Over the last ten years, the market has been kept adequately supplied by a very large movement of palladium out of existing stocks, as is evidenced by trade statistics suggesting net withdrawals of around 10 million oz from Swiss and UK inventories between 2007 and 2016," Johnson Matthey said.
"While we do not believe that above-ground stocks have been exhausted, no market can support large deficits indefinitely."
Technical analysts say palladium trading near the top of a 30-month Bollinger band suggests an overbought situation and high chances of a correction.
Overall, precious metals markets are waiting for the outcome of the Fed's meeting.
Higher rates as expected by the market could boost the dollar, which when it rises makes dollar-denominated commodities more expensive for holders of other currencies. [FRX/]
"Markets will be scanning the Fed's language to see what it is thinking in terms of forward rate guidance and looking for clues on how it will shrink the balance sheet," Societe Generale's Bhar said.
Silver was down 0.1 percent at $17.15 per ounce, after touching a one week low of $17.07. Platinum rose 0.8 percent to $942.90 per ounce.
(Additional reporting by Nithin Prasad in Bengaluru; Editing by Mark Potter)