Is palladium the new platinum? Jewelers in this country may balk, but for cost-conscious jewelry makers in China, the answer is increasingly yes.

The price of platinum's cheaper, lesser known cousin has risen sharply in the market over the past few years on growing demand from the industrial and investment sectors. But the silvery-white metal has recently found a new end market in China – in jewelry, as a platinum substitute.

Palladium has seen expansive growth in the Chinese market as the cost of platinum has risen beyond the reach of the country's less affluent consumers, and market analysts expect to see additional growth this year.

"We are palladium bulls," JPMorgan analyst Steve Shepherd said in a recent report. "We would argue the potential exists for explosive growth in the fledgling palladium jewelry market – a market which seemed to appear from nowhere three years ago, in China."

Palladium prices peaked last year at $396.50 ounce in May – as most metals did amid sharp gains in the commodities bull market of early last year. After coming down slightly from the peak, the metal has begun its climb again in 2007.

Palladium started the year at $325 an ounce and has risen about 8 percent to $352 since then. Platinum has made a similar move, from $1,135 in January to about $1,232 currently. The two metals are coincidental; a mine of one typically produces a certain amount of the other.

Chinese demand for palladium – like Chinese demand for nearly every commodity – has contributed to its rapid price appreciation. In particular, the country's demand for palladium in jewelry has surged as platinum has become more expensive.

Demand for palladium in jewelry stood at about 250,000 ounces worldwide in 2003, mostly due to its use as an alloy with other metals and roughly static with where it had been for years. Then demand ballooned to 920,000 ounces in 2004. It surged again in 2005 to 1.43 million ounces.

"You've added 1 million ounces to demand in a two-year period," said HSBC analyst Victor Flores. "That is the effect of China jumping into the market."

Last year, demand slipped as China dipped into the stockpiles it created in the two previous years of growth. But analysts expect Chinese demand for palladium jewelry to increase again this year.

In the U.S., and around most of the world, palladium is used primarily as an autocatalyst in gasoline-fueled engines. Automakers have increasingly turned to palladium as a partial substitute for platinum in catalytic converters to reduce costs.

Demand for palladium in jewelry in the U.S. is virtually nonexistent. But at least one American company has been trying to boost palladium's popularity across the Pacific, where the trend is nascent but potentially growing.

Stillwater Mining Co. mines palladium and platinum in the mountains of south-central Montana. High market prices for the metals helped propel the company to a $2.8 million profit in the fourth quarter, reversing a year-ago loss. Frank McAllister, Stillwater's chairman and chief executive, has trumpeted the use of palladium in jewelry.

Last year, the Billings, Mont.-based company launched a campaign to promote palladium jewelry in China, with advertisements in Beijing and Shanghai. Yet Stillwater sells all the palladium it produces to the auto industry.

Why hawk baubles when your end market is engines?

"It raises the price," he said. "We know there has been excess inventory in the marketplace, and obviously this is a good source of demand."

Unlike supplies of many other metals today, palladium supply on the world market is robust. Russia in particular is sitting on a great deal of inventory. Sparking a new source of demand for palladium, such as for jewelry, could help cut down supply and lift prices further.

So far demand for palladium in jewelry has been largely confined to China's secondary cities – not trendsetting areas like Beijing or Shanghai, McAllister said.

"If you're talking about the fashion jewelry market, the higher the price of platinum, the less presence it has at that (lower) end of the market. Palladium is a good alternative at that level," said Jeremy Coombes, a spokesman for platinum distributor Johnson Matthey spokesman.

The metal has yet to make a real entrance into China's more prosperous markets, or in the U.S. for that matter.

But palladium has had its day here, too. The metal enjoyed favor in this country during World War II, when jewelry makers switched to palladium when platinum was stockpiled for the war effort.

Whether palladium's popularity as a platinum jewelry substitute spreads will depend on whether consumers will still buy the metal at today's higher prices, said HSBC's Flores. It may also depend on whether the trend gains traction in other markets, beyond China's outlying cities.