Of all the precious metals of interest to investors, palladium may be the one to watch going into the second half of 2012.

Palladium’s supply and demand fundamentals are bullish for the metal’s price, with a widely predicted supply deficit starting this year and deepening by next. Meanwhile, demand is rising.

Still, you would never have guessed that based on its recent performance. Currently, the price isn’t far off its lows. The problem to date is that in a “risk on” environment, palladium, which is used largely in automobile catalytic converters, has been getting shorted aggressively, especially by the hedge funds, says Wiktor Bielski, the London-based global head of commodities research at VTB Capital, the Russian investment bank. To understand why palladium has traded down despite the strength in the auto market, you have to keep an eye on the long versus short statistics released every Friday by the U.S. Commodity Futures Trading Commission, Bielski says, noting that all of the industrial metals are trading like risk assets right now. With palladium, “I have to say that anybody playing the short side has done very well,” he says. But, Bielski insists, “you can’t fight the fundamentals forever.”

After hitting a year-to-date high of 71.51 on February 22, ETFS Physical Palladium Shares (PALL), the only U.S.-listed ETF backed by physical palladium, closed on July 9 at 57.48, a decline of 19.6 percent. At this level, PALL isn’t far from its 52-week low of 52.90, and it’s well off its 52-week high of 83.90.