UBS: Gold prices may soften as stock prices rise and investor confidence increases

With stock markets around the world marching higher and Europe's sovereign debt crisis easing, investors have become increasingly warm to a global economic recovery. And this more optimistic view will weigh on the price of gold, UBS said on Monday.

"We see gold now in a challenging environment and so downgrade our one-month target to $1550 from $1775 and three-month forecast to $1600 from $1950," Edel Tully said in a note on Monday.

"The broad market view of the global economy, particularly the U.S., is now more accepting of a sustainable recovery and reduced cyclical risks."

Tully says the recent spike in U.S. Treasury yields is the latest sign that investors are banking on an economic recovery and easing their appetite for risk. He says the market is also beginning to question the Federal Reserve's stance on holding interest rates into 2014 -- adding that economists at UBS believe rates may begin to move in the middle of 2013.

He says in Europe the economic picture may not be as dark as previously thought, and this may add further pressure on the price of the precious metal.

"Recent evidence suggests that the outlook for the European economy may actually not be as bleak as initially feared," he says. "Although Q4 GDP growth contracted by 0.3%, leading indicators of late point to a less-severe scenario; those have prompted our economists to upgrade their 2012 full-year forecast to -0.4% from -0.7%."

Tully says it's clear that gold is "capped in this environment" and a quick look at physical demand is a good indicator on whether it's nearing a floor.

"So far, though, there have been no constructive signals in that regard, with the response from physical markets very inconsistent," he says.

While Tully may be correct. Some analysts think that the market is at its peak or near it and bound for a sharp decline. Any new troubles in such debt ridden countries as Ireland, Spain, Italy, Portugal or Greece might change the mood of investors and lead to a sharp reversal of recent rises in markets. Other factors such as the Iran nuclear crisis or the rise in oil prices could also negatively effect stock prices. For more see this article.