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* Palladium ETF holdings hit a record 2.271 mln oz
* Further inflows of metal expected later this year
* Growth of ETFs seen tightening palladium market balance
By Jan Harvey
LONDON, May 20 (Reuters) - Holdings of physically-backed palladium exchange-traded funds hit record highs this week after heavy inflows into two products launched in South Africa in March pulled in half a million ounces of metal in less than two months.
From here, analysts say holdings of palladium ETFs - popular investment vehicles which issue securities backed by physical metal - are likely to climb further as investors seek exposure to this year's best performing precious metal.
Palladium has outperformed platinum this year in both rand and U.S. dollar terms, reaching its most expensive compared with its sister metal since mid 2002 earlier this month.
A member of the platinum group metals family, palladium is chiefly used as a component in autocatalysts, primarily in the petrol engines favoured in the U.S. and Chinese markets.
ETF holdings, as measured by Reuters, hit 2.271 million ounces, beating the previous all-time high from 2011 of 2.269 million ounces, after a near 8,000-ounce inflow into Standard Bank's Johannesburg-listed AfricaPalladium ETF on Monday.
AfricaPalladium and a second fund, Absa Capital's New Palladium, were launched in March to meet demand from South African investors seeking a domestic palladium fund.
"We've seen half a million ounces go into the ETFs so far -- that's in less than two months," Mitsubishi analyst Jonathan Butler said. "If we were to see that rate of growth sustained for the remainder of the year, we could be at well over a million ounces."
"Our basic assumption this year is that we'll see further growth," he added. "In the short term, for the remainder of this year, we expect it to be a very strong element of demand, and to push the palladium market even further into deficit."
The Johannesburg-based palladium ETFs were hotly awaited by South African investors after a similar platinum-backed fund launched by Absa in 2013, NewPlat ETF, saw huge inflows, growing within four months into the biggest fund of its kind.
The two funds now hold 568,000 ounces of palladium. Those inflows, along with supply concerns from number one producer Russia due to its stand-off with the West over Ukraine, have helped drive prices to their highest since August 2011 at $827.50.
They are currently just below that high at $815.75 an ounce, up 14.5 percent from the start of the year, outperforming both gold, which is up 7.2 percent, and platinum, up 7.4 percent.
Unlike other precious metals palladium has historically been little used as an investment vehicle, with investment accounting for only 38,000 ounces of palladium demand last year, according to GFMS analysts at Thomson Reuters. The popularity of the palladium ETFs suggests this is changing.
With supply constrained by an unprecedented four-month strike among platinum group metals miners in South Africa, source of around a third of global palladium supply, and demand expected by GFMS to show continued growth, the metal's market balance is expected to tighten, it said in a report last month.
"We expect palladium to remain in deep physical deficit (this year) in the order of 1.3 million ounces, metal that will need to be released by investors in order for the market to clear, suggesting that, barring the unlikely event of major disinvestment, prices will remain well bid," it said. (Reporting by Jan Harvey; Editing by Veronica Brown and Susan Thomas)