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(Kitco News) - UBS lowered its 2102 average gold price estimate to $1,680 an ounce, down from the previous figure of $2,050, the bank said, reflecting the recent swoon in prices.

It left its 2013 average estimate for gold at $1,725. Its silver 2012 average price outlook was lowered 4% to $33.40 an ounce, with its 2012 estimate of $27.50 left unchanged. The bank raised its platinum average price estimate for 2012 to $1,700 an ounce from $1,675 and left its 2013 average estimate at $1,900. The palladium forecast was increased by 5% to $725 an ounce for an average price in 2012; the 2013 price estimate was not changed from the previous forecast of $850.

“A continuing U.S. recovery, material erosion in Fed quantitative easing expectations, rising Treasury yields, a stronger dollar and questions surround the durability of the Fed’s low-until-2014 rate pledge all combine to act as the prime culprits that cause us to pare back, for now, our previously aggressive call” on gold, UBS said Thursday in a research note dated Wednesday.

While the bank as reduced its gold price expectations for now, this is not a “sea-change in our core view,” they said. Gold prices are expected to be weaker in the second quarter, but they expect a sharp rise in gold prices in the second half of 2012.

For the near-term, gold will have more competition with growth-orientated asset classes, they said.

“For us to start thinking that the multi-year bull run is under threat, we have to be sure that the US economic data is not going to roll over and that credit stresses won’t emerge again a few months down the line. And on that likelihood, which markets started to price-in in March, we’re not fully convinced. If they did, the emergence of a deflationary environment would likely push the monetary authorities to reflate, which would be very gold-positive,” they said.

Overall, their outlook for metals and the mining industry for the second quarter is one of weakness. The end of central bank stimulus, a slowdown in Chinese growth and a potential cyclical slowdown in U.S. growth may hamper the metals markets.

Of these three risks, UBS said in its commodity price review, “we are seeing gathering evidence that the first two themes are working. However, there is no conclusive evidence of an increase in U.S. credit stress, nor consistent signs of a U.S. slowdown. On our investment clock that leaves us firmly in … the disinflationary boom.”

This investment environment is “benign” for riskier assets and should allow U.S. growth stocks and the U.S. dollar to perform best, and this is where they recommend investors position themselves now. Miners and emerging markets should underperform in this market, they add.

For the second quarter, UBS said their preferred investments are palladium, based on the U.S. economic recovery and dwindling Russian inventories; platinum, also because of the U.S. recovery and on high-cost South African output; and on iron ore because of tight supplies.  UBS is also bullish on PGMs for these reasons on a 12-month view, too.

On base metals, UBS said they’ve lowered their forecasts relative to consensus for copper, nickel, zinc and lead by 5% to 15% and have become modestly bullish on aluminum.

By Debbie Carlson of Kitco News dcarlson@kitco.com

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