Apple's iWatch Is Not A Catalyst For Gold

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Includes: AAPL, AGOL, GLD, IAU, OUNZ, SGOL
by: Ben Kramer-Miller

Summary

Based on generous assumptions regarding gold iWatch production and each watch's gold content gold bulls have grossly exaggerated the iWatch's impact on the market.

The iWatch will probably make a noticeable, yet small dent in the gold market, and it is hardly a reason to buy gold.

If you think optimistic gold iWatch sales figures are realistic buy Apple, not gold.

There are other, unrelated reasons to buy gold, but industrial demand shouldn't be considered as a primary driver.

In any market the bulls are prone to exaggeration. This can be especially frustrating when exaggerated claims are made about an asset of which I'm bullish because it means that my market opinion is aligned with someone who I disagree with.

Somebody recently sent me an article with the downright egregious headline "Apple buying a third of the world's gold to meet demand for iWatch." The author claims that Apple's (NASDAQ:AAPL) iWatch will contain ~2 troy ounces of gold (NYSEARCA:GLD) and extrapolates out other data to project that Apple will consume ~1/3 of the world's annual gold production.

How did the author get to such an incredible figure?

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 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. There's no doubt in my mind that Chinese gold demand is strong, but let's take this assumption to its logical conclusion. 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. We should also note that should the company really generate $120 billion from this one sub-product that this is more than half of the company's trailing 12-month revenues of ~$210 billion and that it is substantially larger than the revenue streams of most fortune 500 companies. The idea that a single sub-class of an accessory produced by one company will generate more revenue than, say, retail giant Target (NYSE:TGT) is far-fetched in my mind. We can also compare this figure to the annual revenues of the world's top high-end watch maker--Rolex--which came in at ~$4.5 billion.

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 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.

We also have to call into question this notion that the iWatch is going to contain 2 troy ounces of gold. The chain of information gets us to an Apple blogger who was trying to calculate the cost of the gold iWatch prior to its release, and in doing so he provides the gold value assuming various amounts of gold are used. The numbers are 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.

According to MacWorld UK the heaviest gold iWatch is the 42 mm 18 carat rose gold with white sport band--120 grams. Now granted, I couldn't find the exact gold content of this watch, and gold is probably one of the densest, if not the densest element present in the iWatch, but a glance at the picture reveals that there simply isn't enough gold for the 62.2 gram figure to be reasonable, especially considering that we're talking 18 carat gold (aka an alloy that is 75% gold).

(Source: MacWorld UK)

If this contains 2 troy ounces of gold it needs to contain 83 grams of 18 carat gold or make up 69% of the watch's weight. Maybe my skepticism is misplaced but judging from that picture 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 we've seen that several of the numbers that lead the author to such a large amount of gold consumption are exaggerated the 1 million watches per month may reflect near-term demand as this highly anticipated Apple product becomes available. I suspect that it will taper off considerably after the pent-up demand is met but it is certainly possible that Apple could sell 10% of this figure, or 1.2 million gold watches per year. This may seem small for Apple, but again it will be selling mostly lower-end watches, and this 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 just 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. More importantly strong iWatch sales expectations shouldn't drive you to buy gold. If you think the iWatch will perform well buy Apple. 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.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.