NEW YORK (Dow Jones)--Physical metal-backed exchange-traded funds sparked a "sea change" in platinum and palladium markets by bringing in investors who otherwise wouldn't have bought the metal, said Jon Nadler, senior metals analyst with Kitco Metals Inc. North America.

Speaking at the CPM Group Platinum Group Metals Seminar at the New York Mercantile Exchange, Nadler said that platinum and palladium ETFs removed investment barriers to European investors and augmented demand for the metals among historic investors in U.S. and Japan.

Investor holdings of platinum group metals have been on the rise since 2007 as low interest rates, a lower dollar and worries about future inflation fan demand for hard assets.

The advent of the platinum and palladium ETFs "marks a pivotal development" in the platinum group metals market, Nadler said, adding that currently there are five platinum and five palladium ETFs available.

European investors were well aware that platinum and palladium offered a chance to diversify away from gold and protect their portfolios, but the high taxes made the cost of such investments prohibitive.

"For such investors platinum group metal ETFs could not have come at a better time," Nadler said.

These products circumvent large value-added taxes that discouraged European investors from buying certain types of platinum and palladium bars and coins.

Historically, Japan and the U.S. have dominated investment in physical platinum and palladium. Both groups of investors consider the tight mine supply and growing demand from industrial users a "compelling case for a continuing robust level of investment activity," he said.

However, while Japanese investors also tend to focus on price levels, U.S. investors tend to buy platinum as a hedge against a future increase in inflation and as an alternative to gold.

The ETFs, many of which were launched in 2007 and after, buoyed investment demand for these metals and helped platinum prices rise 57% even as the platinum market faced a supply surplus of about 850,000 troy ounces.

"Clearly, the ETF investment niche took care of a good portion of the surplus present in the marketplace," Nadler said.

-By Tatyana Shumsky, Dow Jones Newswires; 212-416-3095; tatyana.shumsky@dowjones.com

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