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LONDON, March 20 (Reuters) - Rapid flows of investor money into physically backed platinum exchange-traded funds (ETFs) and a sharp drop in speculative bets on lower prices suggest the autocatalyst metal is on the verge of a recovery.
Large supply surpluses and falling demand, particularly since Volkswagen's "dieselgate" scandal in 2015, have eroded platinum's popularity to the extent that prices have dropped below those of palladium and gold.
Emissions-reducing catalytic converters in diesel vehicles contain more platinum, while sister metal palladium is a larger component in gasoline engines.
At about $850 an ounce, platinum is near its lowest in a decade and around a third of its value in 2008. That price barely covers production costs in top producer South Africa.
"Looking at it from a long-term value investor perspective, now is the time to put money in," ICBC Standard analyst Marcus Garvey said.
Holdings of platinum in ETFs tracked by data company Refinitiv have leapt more than 325,000 ounces, or 16 percent, from a December low - the fastest build since 2013.
Speculative bets on NYMEX have also flipped, with a net short position - bets on lower prices - in February of 1,606 contracts equivalent to 80,300 ounces turning to a net long of around 1 million ounces.
"It's a longer-term bet on platinum being undervalued," Mitsubishi analyst Jonathan Butler said. "The fundamentals are not particularly exceptional in the short term, but longer-term they have good potential."
The World Platinum Investment Council (WPIC) predicts investment demand for platinum this year at 530,000 ounces, up from just 15,000 ounces last year and the most since 2016, driven by hopes of a shrinking surplus and stabilizing sales of diesel cars.
A gaping supply deficit, meanwhile, has pushed palladium prices to record peaks around $1,600 an ounce, which could spur carmakers to use less palladium and more platinum.
High prices have made the average vehicle around $50 more expensive to produce, costing the global automotive industry more than $5 billion, according to analysts at Citi.
Research has shown that platinum is less effective than palladium, specialist materials supplier Johnson Matthey said in a report in February. But the price disparity means "the substitution story has to happen, it's just a case of when," said Johnson Matthey analyst Rupen Raithatha.
Output in South Africa, which accounts for more than 70 percent of mined platinum production, is expected to decline due to years of underinvestment, analysts say, and short-term supply could also be hit by labor disputes this year.
But the rosy outlook is not shared by all. With jewelry demand also flat, Julius Baer analyst Carsten Menke predicts more years of oversupply.
While tighter emissions standards mean more platinum or palladium is used in each vehicle engine, car sales are slowing in Europe, the United States and China, which could push demand lower.
The WPIC expects a surplus of 680,000 ounces of platinum this year in the 8-million-ounce market - the largest oversupply in at least six years.
"The only bull case for platinum you can make is substitution (from palladium)," Menke said. "That doesn't seem to be happening."
(Reporting by Peter Hobson; Editing by Pratima Desai and Dale Hudson)