Palladium prices have soared to their highest level in 2 1/2 years on Russian supply concerns.

Given the probability of increased economic sanctions, palladium still has room to rise.

Russia is the world’s biggest supplier of palladium. The rare metal is a key component in catalytic converters, which keep cars running cleanly. As the world economy slowly recovers, so have auto sales. Therefore, demand for palladium has been increasing.

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But supply is going down. South Africa is the second-largest producer of palladium. But miners there have been striking for longer than anyone expected and there is no end in sight. The impacted mines have remained idle for more than two months, causing two problems. First, with no new palladium being mined, inventories at the mines are being exhausted to meet demand. Second, the mine infrastructure is degrading, making repairs lengthy and expensive.

To add insult to injury, more than half of the world’s supply is mined in Russia. Palladium is a large component of Russian’s mining industry, which is in turn a key component in Russia’s fragile economy. The Russian government has dominated palladium sales and considers the nation’s stockpile of palladium a state secret. It has used its control over palladium as a political tool in the past.

Any escalation in sanctions between the West and Russia has the potential for boosting palladium prices.

The Obama administration is considering bolstering their weak sanctions against Russia for its role in annexing Crimea and one target being discussed is Russia’s mining industry. For example, banning purchases and imports of Russian palladium would hurt Russia’s miners and their economy. But that would also hurt American carmakers, which would have to buy palladium from supply accumulated by speculators, who would certainly boost prices.

If Western sanctions don't hurt palladium, it would send a signal to Putin that the West needs access to Russia’s palladium. The Russian government could respond by cutting off palladium supplies to the United States. and EU. The impact would be the same as if the United States or EU initiated sanctions on Russia’s mining industry.

Basic economics apply here. When supply decreases while demand increases, prices usually rise. Palladium has that potential. (Editor's note: Thursday, palladium fell $1.15, or 0.2 percent, to $758 an ounce. Earlier this month, palladium neared $790, it's highest price since September 2011).

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