The recent collapse in gold prices has forced UBS to downgrade its price expectations, not just for gold, but also for the whole precious metals complex.

According to the bank, the forcefulness of the recent correction was, in many ways “baffling”, even when the negative factors like concerns around Cyprus are taken into consideration.

In a note out this morning UBS says sentiment toward the metal has been dealt a severe blow. With some concerned about gold’s credibility as a safe haven after the violence of the recent sell-off.

And, as a result, the market needs time to heal, the bank says.

This healing process is likely to take time but, UBS believes that the precious metal is likely to recover from current levels, albeit along a course that is expected to be “neither easy nor straightforward”.

Without a strong catalyst in the short term, UBS says there is no urgency within the market to push prices higher but, further out a number of positive signs remain.

“As confidence and trust are regained, we think gold should be able to venture higher as uncertainties in the macro space and continued accommodation from key central banks across the globe prompt investors to remain interested in gold,” the bank writes.

It says, “Negative feelings linger on the back of expectations of US and global growth improvement, the view that tail risks in the Eurozone are much reduced, the diminished role of safe havens and growing preference for other assets (equities), and rising talk of tapering QE at the FOMC.”

But, adds, amidst this poor sentiment is the realization that gold has already fallen a great deal and, the reappearance of physical demand has some investors tentatively dipping their toes back into the market.

“Interestingly, gold’s display of resilience at these lower levels has prompted some long-term holders to actually add to positions. There have also been some indications of interest in converting ETFs and metal accounts into allocated holdings.

The surging growth in physical demand is another positive for the market with both short and longer term implications. In the short term it has proved a bulkhead against declining investor sentiment, while, longer term, “this type of buying usually means that metal has been taken out of the market for a considerable period of time to come.”

“Physical markets have done their part; it is now up to investors on how they view the market from here. After all, while physical buying provides a solid floor, investment appetite ultimately holds the firepower to propel prices higher,” it writes.

Price forecasts.

The bank now expects gold to average $1600 during 2013 from $1,740, and $1625 in 2014E from $1700 previously.

For silver the bank writes, “We revise our 2013E silver price forecast to $29.0 from $32.3 previously, in line with recent market developments. For 2014E, we forecast an average silver price of $30 from $31 previously. Short-term targets now sit at $26 and $28 for one month and three months, respectively, from $33 and $37 previously.”