Palladium ETFs underperformed gold by a wide margin in 2011 but have held their own in recent months on an improved outlook for the global economy.

A potential shortfall in physical palladium supply has helped boost investment appetite for the physically backed palladium ETF. Meanwhile, fund providers are hoarding more of the precious metal.

ETFS Physical Palladium Shares (NYSEArca: PALL) is up 1.9% over the past month, even as other precious metals were showing negative returns.

In the first quarter, manager ETF Securities saw inflows into PALL and ETFS Physical Platinum Shares (NYSEArca: PPLT) that were seven times greater in ounces than its gold product, ETFS Physical Swiss Gold Shares (NYSEArca: SGOL), said manager director Will Rhind.

“Investors took the opportunity to invest in platinum and palladium over gold as economic growth sentiment in the U.S. improved,” Rhind said.

Investors should be aware that despite its “precious metals” designation, palladium is primarily used in industrial applications and is likely to fluctuate with economic ups and downs, says Morningstar analyst Abraham Bailin.

Aside from electronics, clean energy tech and jewelry, palladium is mainly been used in the autocatalyst for gasoline engines, which has contributed to the growing demand as the world economies improve and more people purchase new vehicles. More recently, palladium has begun turning up in diesel engines, which typically use platinum.

Spot palladium prices are back at around $674 per ounce. Palladium is closing in on its $681 50-day and $684 200-day resistance levels. In comparison, platinum is trading at around $1,563 an ounce.

In 2012, global carmakers are projected to produce 80 million vehicles, with 6.24 million ounces of palladium sitting in their engines, or 6% more than last year and a new record high, reports Nathan Slaughter for StreetAuthority.

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