There are certainly reasons to own gold such as wealth preservation and as a hedge against rising rates, but demand for the iWatch, or from industry more generally, has not been a major catalyst driving the gold market, so if you think the iWatch will perform well – buy Apple – not gold. Let me explain further.
Edited excerpts from an article* by Ben Kramer-Miller as posted on SeekingAlpha.com under the title Apple’s iWatch Is Not A Catalyst For Gold.[I recently read] an article with the downright egregious headline “Apple buying a third of the world’s gold to meet demand for iWatch” [in which the] author claims that Apple’s iWatch will contain ~2 troy ounces of gold and extrapolates out other data to project that Apple will consume ~1/3 of the world’s annual gold production.
[It would seem] the author got to such an incredible figure by:
1: Aggressive Rounding
The author estimates that Apple will use 746 tonnes of gold, which is a number that I will scrutinize, but if we compare this to 2013 gold production–~2,770 tonnes–we get to 27%. The headline number says “one third” or 33.3% and the conclusion uses 30%. The author gets this figure by using a gold production figure of 2,500 tonnes, which is simply too low. 2014 production was likely flat to slightly down from 2013 but the decline, if any, was minimal.
2: What About Recycling?
The author neglects to include recycled gold, which is substantial and brings total annual supply closer to 4,000 tonnes. This gets us down to 19.6%.
3: 746 Tonnes/Year?
This number is the product of two estimates:
- the amount of gold in each watch and
- the number of gold watches that Apple will sell.
Let’s look at the latter – the number of gold watches that Apple will sell – first.
- The author cites a WSJ article which estimates that gold watch production will reach 1 million units per month (12 million per year) in the second quarter in order to meet insatiable Chinese demand…
- The gold iWatch is going to cost at least $10,000 and many variations will cost substantially more. If Apple is really producing 12 million gold watches per year and charging $10,000 a piece this means the company will generate an additional $120 billion just from this one product.
- The figure seems high to me considering that most iWatch consumers will opt for one of the several cheaper variations that cost in the hundreds of dollars…
- should the company really generate $120 billion from this one sub-product [then] that…is more than half of the company’s trailing 12-month revenues of ~$210 billion and that is substantially larger than the revenue streams of most fortune 500 companies. Indeed, the annual revenues of the world’s top high-end watch maker, Rolex, was only ~$4.5 billion in 2014.
- The idea that a single sub-class of an accessory produced by one company will generate more revenue than, say, retail giant Target is far-fetched in my mind.
- Do Apple and the analyst cited by the WSJ blog envision a massive near-term upward revaluation of the Yuan that would all of a sudden put millions if not hundreds of millions of Chinese citizens in a position where they can afford a watch that costs over 3,000 [times] more than the price of the average Chinese watch ($3)? As bullish as I am on gold and on China’s long-term economic outlook I sincerely doubt it.
Now let’s look at the estimate of the amount of gold in each watch:
- …The notion that the iWatch is going to contain 2 troy ounces of gold…[came from] an Apple blogger who was trying to calculate the cost of the gold iWatch prior to its release, and in doing so provided the gold value assuming various amounts of gold that might be used. The numbers were in increments of 50 grams going from 50-200.
- This puts the 2 troy ounce figure (62.2 g) towards the lower end of the blogger’s range, although I would argue that it sits at the edge of reality…especially considering that we’re talking 18 carat gold here (aka an alloy that is 75% gold)…If the iWatch were to contain 2 troy ounces of gold it would need to contain 83 grams of 18 carat gold or make up 69% of the watch’s weight…I would be shocked if the watch contained nearly that much gold.
How Much Gold Will Apple Consume in the iWatch?
Apple may not be set to consume a third of the world’s gold production but it is still going to consume a fair amount.
- While…the 1 million watches per month may reflect near-term demand…I suspect that it will taper off considerably after the pent-up demand is met. It is certainly possible [though] that Apple could sell 10% of this figure, or 1.2 million gold watches per year….[and that] figure still puts Apple’s high-end watch revenue at over 3X Rolex’s.
- Furthermore, while the iWatch doesn’t contain 2 troy ounces of gold it could easily contain a third of that. This means that Apple could consume ~25 tonnes per year on..the iWatch. That is definitely not nearly as much, but consider that this is nearly 1% of annual mine production going towards just one product. Consider also that net central bank demand in 2013 was ~370 tonnes, which means Apple’s annual demand comes in at nearly 7% of that.
(Readers should also keep in mind that Apple uses small amounts of gold in every single one of its major products. For instance the iPhone contains 0.0373 grams of gold. Assuming 100 million in sales (conservatively) and given that there are 1 million grams in a tonne the iPhone consumes nearly 4 tonnes of gold per year.)
The Bottom Line
The iWatch has the potential to be a new source of gold demand that can put a dent – albeit a small one – in the market but the iWatch isn’t going to have the impact on the gold market that some gold bulls might think.
[The above article is presented by Lorimer Wilson, editor of www.munKNEE.com and has been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. This paragraph must be included in any article re-posting to avoid copyright infringement.]
*Original Source: http://seekingalpha.com/article/3002776-apples-iwatch-is-not-a-catalyst-for-gold?ifp=0
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