Will the Apple gold watch move the market – probably not

Will the Apple gold watch move the market – probably not

But it should have an impact on consumption.  Given that it is being made in China perhaps that’s where all that missing SGE gold is going!

Apple has announced that its new smart watch will be going on sale next month, and the pricing, which will run from $349 for a bottom of the range 32mm case version up to $17,000 for its top of the range 42mm gold cased Edition version.  But nowhere has it stated how much gold will be utilised in its top end model.

What we can, perhaps, compare it with is the solid gold Rolex President – a chunky piece of mechanical watch kit, but where a complete breakdown of its gold content was published back in 2006.  That article is nowadays downloadable off the UK eBay site – click here to view.  This article suggests that the watch casing, bezel etc. only contains around two-thirds of a troy ounce of pure gold, but the whole package something over two ounces, that balance being provided by the strap which contains over one and a half ounces of pure gold.  The article does not mention the case diameter but we would assume around 40mm which is comparable with the top end Apple watch, but rather larger than the 32mm version.

However the actual weight in an Apple watch would also be dependent on case thickness and it is not being offered with a gold strap as yet.  Until someone buys one, takes it apart and weighs the components we probably won’t know, but we would guess at between 0.5 and 0.75 ounces.  Assuming the innards are the same as the base model, Apple would be making a very significant mark-up on the component cost given the $17,000 price tag and an assumed gold content cost of say $900.  But even if Apple surprises us with a far heavier version containing say an ounce or more, it would still be making a huge mark-up on the gold content, which strikes us as a pretty smart profit ploy if it can sell the gold versions in quantity.

But of course sales volume is the other key element here.  Can it sell its gold Editions in volume?  On the face of things one would think that would be a difficult task, but its probably not aiming its watch at a value oriented high end jewellery buyer per se, but for younger techies, often with really good disposable incomes, who are happy to queue in line overnight and swamp the Apple store on launch dates for the latest piece of gear – or the generation falling over itself in China (which Apple sees as its likely main market) to buy gold plated cellphones at exorbitant costs.  Apple’s marketing expertise (hype) will undoubtedly stand it in good stead here.  But to sell, as some have suggested, one million gold Apple Edition watches a month - that strikes one as marketing hype of the highest order.  But then Apple has delivered on many of at-the-time seemingly optimistic targets in the past, although whether it can still do so in the post-Steve Jobs management generation perhaps remains to be seen.  And, it has to be said, has also had its failures too.

But, let us assume that perhaps Apple has ordered one million such watches, each containing say half an ounce of gold for its launch, then that would require 500,000 troy ounces of gold or around 15.6 tonnes.  That certainly wouldn’t be enough to move the gold market, although it could already well have accounted for a small proportion of the gold volumes we’ve seen move through the Shanghai Gold Exchange in recent months given that Apple’s Chinese suppliers will have needed to build inventory.

Now it is possible that at some future stage a gold strap may be offered, but at a price, which could further boost the gold content.  It is also possible that, if sales of the gold Edition watch are looking successful then it may encourage other manufacturers also to offer gold versions of their products too and tap into the techno-bling generation.  Who knows where it will all lead.

But, the big question facing gold investors is will this have any real impact on the gold price – even if Apple does sell its gold watches in huge numbers?  The gold price seems to be being so micro-managed these days by ‘trades’ on the paper futures markets that actual supply and demand fundamentals seem to have only a relatively minor bearing on the metal price – at least for the moment.  It is an interesting development for sure, if only to see if Apple can market such a high value product in volume – but as a game changer for the gold price, we don’t think so, but would love to be proved wrong!

Could Apple Buy a Third of the World’s Gold? - Frank Holmes

Frank Holmes picks up on Apple’s new watch for which the top end model may contain as much as two ounces of gold and for which Apple reckons it may sell as many as 1 million units a month!  That’s an awful lot of gold.  Seems a huge amount for a single watch too and market size may not be realistic for such a high cost watch - so read with caution

Is there anything Apple can’t do?Thing gold. Apple

First it revolutionized the personal computing business. Then, with the launch of the iPod in 2001, it forced the music industry to change its tune. Against initial market reservations, the company succeeded at making Star Trek-like tablets hip when it released the iPad in 2010. And in Q1 2015, a record 75 million units of its now-ubiquitous iPhone were sold around the globe. The smartphone’s operating system, iOS, currently controls a jaw-dropping 89-percent share of all systems worldwide, pushing the second-place OS, Google’s Android, down to 11 percent from 30 percent just a year ago.

As you might already know, the company that Steve Jobs built—which we own in our All American Equity Fund (GBTFX) and Holmes Macro Trends Fund (MEGAX)—is history’s largest by net capitalization. In its last quarterly report, Apple posted a record $75 billion in revenue and is now sitting pretty on a mind-boggling $180 billion in cash. Many analysts believe the company will reach a jaw-dropping $1 trillion in market cap.

So what’s Apple’s next trick?

How about moving the world’s gold market?


Apple Watch Edition sporting a 18-karat gold caseThis April, Apple will be venturing into the latest wearable gadget market, the smartwatch, joining competitors such as Samsung, Garmin and Sony. All of the models in Apple’s stable of watches look  sleek and beautifully designed—just what you’d expect from Apple—and will no doubt be capable of performing all sorts of high-tech functions such as receiving text messages, monitoring the wearer’s vitals and, of course, telling time.

But the real story here is that the company’s high-end luxury model, referred to simply as the Apple Watch Edition, will come encased in 18-karat gold.

What should make this news even more exciting to gold investors is that the company expects to produce 1 million units of this particular model per month in the second quarter of 2015 alone, according to the Wall Street Journal.

That’s a lot of gold, if true. It also proves that the Love Trade is alive and well. Apple chose to use gold in its most expensive new model because the metal is revered for its beauty and rarity.

To produce such a great quantity of units, how much of the yellow metal might be needed?

For a ballpark estimate, I turn to Apple news forum TidBITS, which begins with the assumption that each Apple Watch Edition contains two troy ounces of gold. From there:

If Apple makes 1 million Apple Watch Edition units every month, that equals 24 million troy ounces of gold used per year, or roughly 746 metric tons [or tonnes].

That’s enough gold to make even a Bond villain blush, but just how much is it? About 2,500 metric tons of gold are mined per year. If Apple uses 746 metric tons every year, we’re talking about 30 percent of the world’s annual gold production.

India's Sripuram Golden Temple, the world's largest golden structure, is made out of 1.5 tonnes of goldTo put things in perspective, the Sripuram Golden Temple in India, the world’s largest golden structure, is made from “only” 1.5 tonnes of the metal.

TidBITS acknowledges that the amount of gold is speculative at this point. Two troy ounces does seem pretty hyperbolic. But even if each luxury watch contains only a quarter of that, it’s still an unfathomable—perhaps even unprecedented—amount of gold for a single company, even one so large as Apple, to consume.

Ralph Aldis, portfolio manager of our Gold and Precious Metals Fund (USERX) and World Precious Minerals Fund (UNWPX), likens the idea of Apple buying a third of the world’s gold to China’s voracious consumption of the metal. As I mentioned last week, China is buying more goldright now than the total amount mined worldwide.

“If the estimates of how much gold each watch contains are close to reality, and if Apple’s able to sell as many units as it claims, it really ought to help gold prices move higher,” Ralph says.

But Can Expectations Be Met?

Here’s where this whole discussion could unravel. Although we don’t yet know what the Apple Watch Edition will retail at, it’s safe to predict that it will fall somewhere between $4,000 and $10,000, placing it in the same company as a low-end Rolex.

With that in mind, are Apple’s sales expectations too optimistic?

Possibly. But remember, this is Apple we’re talking about here. Over the years, it has sufficiently proven itself as a company that more-than-delivers on the “if you build it, they will come” philosophy. Steve Jobs aggressively cultivated a business environment that not only encourages but insists on “thinking different”—to use the company’s old slogan—risk-taking and developing must-have gadgets.

“Our whole role in life is to give you something you didn’t know you wanted,” says current Apple CEO Tim Cook. “And then once you get it, you can’t imagine your life without it.”

A perfect case study is the iPhone. When it launched in June 2007, the cell phone market was decidedly crowded. Consumers seemed content with the choices that were already available. Why did we need another phone?

Yet here we are more than eight years later, and as I pointed out earlier, 75 million iPhones were sold in the last quarter alone.

Apple iPhone Sales Reach Record Number in Q1 2015
click to enlarge

So it’s not entirely out of the realm of possibility for Apple to move 1 million $10,000 Apple Watch Editions per month.

Early in January I shared the following chart, which shows various analysts’ Apple Watch shipment forecasts for 2015, ranging from 10 million to 60 million units. Of course, all models are included here, not just the luxury model.

Estimated 2015 Apple Watch Shipments
click to enlarge

Looking at it now, many of the predictions seem a little understated. After all, Apple hasn’t released a dud product in at least two decades (remember the Newton?). Come April, we’ll see for sure what the demand really is—for the Apple Watch as well as gold.

Frank Holmes is CEO and Chief Investment officer for U.S. Global Investors - http://www.usfunds.com