Platinum and palladium will outperform gold, silver and base metals next year, BMO Capital Markets said in a report. 

“Robust demand growth coming from the auto catalyst market and other industrial applications, and a lackluster and uncertain supply outlook, are projected to dramatically tighten the platinum group metals market into 2012,” BMO said.

The report also said platinum group metals would benefit from their gold-like qualities, as investors continue to buy physical precious metals to protect against systemic risks associated with sovereign debt defaults, future inflation and the U.S. dollar.

The bank forecast the overall physical market for both metals to enter a deficit as early as next year, mainly due to production disappointments and labor issues in South Africa, and said upside risk is significant.

“Recycled material and existing stocks,” especially for palladium, “will be called upon to balance the market, making PGMs prices very susceptible to investor sentiment and volatility.”

BMO forecast platinum to average US$1,636 a troy ounce this year and US$1,800/oz. next year, and palladium to average US$480/oz. and US$525/oz.

However, it said, if supply does materialize as expected, then there is a “distinct possibility” that platinum could peak at US$2,400/oz. and palladium could hit US$700/oz.

By mid-afternoon (AEST), spot platinum was trading at US$1554/oz, down US$17 since Friday’s New York close, while palladium was US$487/oz, down $US2.

“Recent examples of deadly accidents and shut downs are indicative of significant production challenges and vulnerabilities faced by miners in South Africa, the world’s largest source of PGMs.”