I feel good about the global economy when I see palladium outperforming. Platinum and palladium are the most industrial of precious metals, and their action suggests that investors should be overweight in a strong global economy.

Palladium and silver are the only two precious metals that have not made new highs since the latest bull market in commodities started in 1999. For comparison, the equally-weighted CRB Index (CII) of 17 different industrial commodities has been making fresh all-time highs. The way I read this is that there is more room for both silver and palladium to run in the next five years, with short-term corrections of the type we saw in May of last year being strong buying opportunities.

Europe has its troubles, which may cause one such profit-taking correction at any time now, but the action from 2010 speaks volumes. Palladium was a standout, up 102%, followed by silver, up 83.5%, gold, up almost 30%, and platinum up 21%.

Introduction of new ETFs has made cash platinum and palladium now investable for individual investors. ETFS Physical Palladium (NYSE: PALL) and ETFS Physical Platinum (NYSE: PPLT) do allow semi-annual audits of the bullion they hold, which is a marketing strategy to capitalize on the critics of the SPDR Gold Trust (NYSE: GLD), which does not. This is why ETFS has also introduced the ETFS Gold Trust (NYSE: SGOL) and the ETFS Silver Trust (NYSE: SIVR).

The super-spike in palladium back in 2000 was again at a time of a strong global economy, when demand for catalytic converters caused scrambling for the metal, which is an indispensable material in making them. The following recession did cool demand for catalytic converters and along with increases supply of the metal — some of it from Russian stockpiles — caused the large decline. But, it looks like we are in potential super-spike territory again.

China has now become the world’s largest car market and the word’s largest consumer of oil. The problem with pollution in China is huge, which is driving up demand for catalytic converters and demand for the metal. There is some substitution between platinum and palladium, but platinum is not cheap either at $1,800/ounce. It is entirely possible that we can trade well into fresh all-time high territory in palladium in the next two years.

The Chinese have tried to reduce pollution and congestion by imposing taxes on new car purchases. China’s vehicle sales are now forecasted to grow 10% to 15% this year after jumping 32% to 18.06 million vehicles in 2010. But even with the slowdown, supply of palladium is still tight.

Russia sold 3.71 million ounces in 2010, representing 52% of global supply. But 1.01 million ounces was drawn from stockpiles. Russia’s state repository Gokhran used to be a big player in the market, but in 2011 is likely to sell less than in 2010 before exiting from the global market in 2012. Could it be that the Fed’s QE2 is a factor in the decision of the Russians to keep more palladium for themselves?

Russia‘s Norilsk Nickel (OTC: NILSY) is the world’s biggest palladium producer and controls U.S.-based Stillwater Mining (NYSE: SWC). For years, Stillwater had many hedges on and was not able to capitalize on the surge in the price in 2008, but many of those hedges have rolled off and the company has better leverage. This is one place to look to play palladium closer to home. The other local play is North American Palladium (AMEX: PAL), which is based in Canada.

South Africa has for many years been the world’s leading supplier of platinum group metals, but there have been political issues with mining rights in 2010. Given the high cost of mining in the country, it will be unwise for the South African government to become hostile to mining conglomerates at a time when more investment in the sector is critical. So two South African companies to consider for further investigation are Impala Platinum (OTC: IMPUY) and Anglo Platinum (OTC: AGPPY). They both have more platinum than palladium exposure, but prices of platinum group metals tend to be correlated, and both metals tend to occur in the same deposit.