I think palletized is supposed to be faster for certain games. It's not the recomended setting because only a few cards can do it(ie: GF2 and GF3). You may find that dynamic will be faster with some other games, but I'm not sure.
Maybe your are using a 3dfx card? the newer 3dfx opengl drivers are reporting a nearly
unlimited card vram size... and my dynamic caching needs to know the available
vram to work fine... an old 3dfx opengl driver (beta 2.1 or something) did the
function right, but later they screwed it... well, I told them the bug years ago,
but now, since 3dfx is dead and buried, I don't think that someone will fix it