Strong speculative demand kept palladium near 16-years highs on Monday, though weak fundamentals are soon expected to take their toll on prices of the metal used to make auto-catalysts for gasoline-fueled 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 steady at $1,266.16 an ounce, having shed 1 percent on Friday in its biggest one-day percentage fall since May 18. U.S. gold futures fell 0.3 percent to $1,268.20.
Palladium gained 0.1 percent to $891.50 an ounce after climbing above $910 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 that there was a shortage of metal for immediate delivery. That shortage has created a premium or backwardation of about $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 show a deficit of 792,000 ounces in 2017 from 163,000 ounces last 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 evidenced by trade statistics suggesting net withdrawals of around 10 million ounces 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, making commodities priced in the greenback more expensive for holders of other currencies.
"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," SocGen's Bhar said.
Silver was at a one-week low of $16.96 an ounce, down 1 percent, while Platinum was up 1 percent at $943.