* Palladium ETP holdings hit 17-month high
* Silver funds also see good inflows in February
* Investors favouring industrial metals over gold
By Jan Harvey
LONDON, March 8 (Reuters) - Holdings of palladium-backed investment funds have climbed to 17-month highs this year even as physical gold funds report record outflows, with investors favouring metals with an industrial edge.
Palladium exchange-traded products (ETPs) saw their largest monthly inflow in a year last month of 127,855 ounces, Reuters data shows, well above their monthly average since early 2010 of 41,693 ounces.
Nearly 90 percent of those inflows were into ETF Securities' European palladium fund and the New York-based fund operated by its U.S. arm.
Gold ETFs, by contrast, reported record outflows last month. Holdings of the largest, New York's SPDR Gold fund, fell by their most ever in February.
"I think it is part of the broader rotation by investors into more cyclically geared assets that started late last year as investors become more confident about the global macro outlook," ETF Securities' head of research Nicholas Brooks told the Reuters Global Gold Forum on Friday.
"At the same time that gold ETFs have been seeing outflows there have been strong inflows within commodity ETFs into copper, platinum, palladium and broad commodity index trackers."
Exchange-traded products, which issue securities backed by physical gold, have proved a popular way to invest in precious metals in recent years. Issuers say they give investors exposure to the underlying metal price without storing and insuring it.
Palladium is one of this year's best performers of the precious metals sector, up 8 percent compared to a 3.9 percent rise in platinum prices and a 5.7 percent drop in gold.
The metal is now at its most expensive compared to gold in 18 months. An ounce of gold bought 2.02 ounces of palladium on Friday, compared to 2.89 ounces last October.
Analysts are forecasting that a drop in supply from major producers Russia and South Africa, combined with decent demand growth from carmakers in buoyant China and the United States, will tighten palladium's market balance this year.
The metal is chiefly bought by the car industry for use in catalytic converters, and is therefore more widely exposed to the economic cycle than gold, which is primarily an investment metal.
"We are forecasting sustained deficits in the palladium market to the end of the decade of (around) 350,000 ounces per annum, which we expect will place upward pressure on prices over the medium term," Deutsche Bank said in a sector report.
Silver ETFs also saw strong inflows last month, of some 9.745 million ounces.
The iShares Silver Trust saw a third month of net inflows in February for the first time since 2010, and has since added another 7 tonnes to its holdings. They now stand at 10,646 tonnes, less than 5 percent below 2011's record high.
Other funds also saw good buying last month, with Zurich Kantonalbank's ZKB Physical Silver Fund reporting half a million ounces' worth of new inflows last month and the JB Physical Silver Fund another 390,000 ounces.
Silver prices have struggled for traction since hitting record highs at $49.51 an ounce in 2011, and have fallen in six of the last eight quarters. With prices near the bottom of the range they've traded in since late 2011, some see a good opportunity to buy the metal.
"Basically confidence in gold is completley shattered, while given the ongoing macro recovery, the more volatile silver is much more attractive," VTB Capital analyst Andrey Kryuchenkov said. "Well over 80 percent of all global commodity ETFs are in gold (so) some re-balancing is in order." (Reporting by Jan Harvey; Editing by Michael Roddy; Editing by Michael Roddy)