"There is no doubt Wales are more advanced than us - especially when you look at the way they finished their World Cup campaign," he said.
"They had been building towards the tournament for two or three seasons and they ended up running champions England as close as anyone. That's the evidence that they are very, very strong - however, we have to believe that we can win."
Paterson argues the new era of Scottish rugby - necessary after the World Cup - and work in his team's favour.
"There have been huge changes for us since the World Cup," he said.
"The turnover of players has been massive, and the new group are coming together on schedule - but we are still behind the other five nations.
"We have, however, a huge amount of confidence and self-belief. If we have the support of the public and we give everything then we can take on anyone.
"I feel much more positive vibes from everyone connected with the game - the supporters and the press. It is very exciting, and we will give it all we have on Saturday."
Paterson added no decision has been taken over who will be front-line goalkicker at the Millennium Stadium.
But he insisted that whoever is given the job will have a huge amount of responsibility on his shoulders.
"It is vitally important, especially away from home, to keep your part of the scoreboard ticking over to stay in the game," he said.
"If you don't turn possession into points you will always struggle.
"The same goes for drop-goal opportunities. They are becoming more and more important in big matches, and you should be looking for them throughout the game and not just in the closing stages."
Paterson expects every Welsh player to be a threat.
He said: "Their forwards are tremendously strong, and they possess individual brilliance in the backline.
"Shane Williams, Rhys Williams and Iestyn Harris are excellent players - while they will have a potent stand-off, whether it is Stephen Jones or Ceri Sweeney."