Published April 16, 2015

Sorry Folks, Apple Won’t Move the Gold Market

In the weeks leading up to the formal introduction of the Apple Watch in March, curiosity among tech and financial journalists reached a fevered pitch. What will it cost? How many apps will be available? What will its battery life be? Will there be an upgrade path? How will Apple Watch impact Apple’s income statement?

All good, albeit predictable questions. Many of them are hanging around as Apple pushes its general release date ever further out. The product was supposed to hit stores April 24, but that won’t happen. Apple says it will continue taking only online orders into June.

One of the more provocative questions—of particular interest to our precious metals newsletter subscribers—is one posed in an article by Josh Centers in the February edition of TidBITS: how will the Apple Watch affect the world’s gold supply?

That question arose because Apple revealed some time ago that there would be three Apple Watch models, and that the high-end model (the “Edition”) would feature an 18-karat gold casing. Mr. Centers, working under the assumption that the Edition would contain two troy ounces of gold and that Apple would sell one million Editions per month, calculated that Apple’s demand for gold would reach 746 metric tons annually. That would equate to a startling 30% of the world’s annual production of 2,500 metric tons of gold.

Mr. Centers, it should be noted, was merely calculating the impact of assumptions about the Edition’s gold content (which came from Apple Spotlight) and about monthly Edition sales (which came from the Wall Street Journal). Rather than vouching for the veracity of those assumptions, he was in fact skeptical of them, as well he should have been.

To begin with, the two-ounce estimate of gold content was overly high. Several years ago, watchmaker and jeweler Timebuilder disassembled a Rolex President and determined that it contained 2.4 ounces of pure gold; 70% of that content was in the band, leaving just 30%, or about 0.7 ounces, in the watch’s body. There’s no gold in the Edition’s band, only in the buckle and the case. How much is there remains an Apple secret (who knew this company kept secrets?), but it seems unlikely that the Edition’s body would contain as much gold as the Rolex President. We think the Edition contains no more than 0.5 ounces of gold.

Yes, the company could roll out an Edition with a gold bracelet, but there’s no indication as yet that it will. So we’re left with addressing how much gold is in the available models.

A March Forbes article agrees with our half-ounce estimate. But even that may be too high. The article goes on to note that a “new Apple patent has surfaced for a ‘Method and Apparatus for forming a gold metal matrix composite.’” Hmmm… The new alloy—let’s call it “Apple Gold”—is “lighter, stronger and more scratch-resistant than ordinary 18 karat gold through alloys of low-density ceramic particles instead of precious metals. It also contains roughly half the amount of pure 24 karat gold as ordinary 18 karat gold (which is 75% gold, 15% silver, and 10% copper).” In other words, Apple assures us, less gold is actually better!

Bottom line: we don’t know the real gold content, and Apple isn’t likely to tell us. But we’re confident it’s no more than half an ounce, tops.

The other half of the equation is sales estimates. That one–million–per–month figure first appeared on the Wall Street Journal’s digital news website on February 17, 2015. Coming from the Journal, it had some degree of credibility, so it was picked up and quoted in other publications, even though WSJ’s cited source (a person “familiar with the matter”) was unsubstantiated. So before we accept those estimates, let’s look at some facts and apply a little reason to the situation.

We now know that the Edition’s retail price starts at $10,000 and with some added features, sells for as much as $17,000. This pricing places the Edition firmly in the category of “luxury” watches. Rolex, the largest of the luxury watchmakers, produces between 700,000 and 800,000 watches per year. Are we to believe that Apple will sell 12 million luxury watches a year in a market where Rolex, with the advantage of a century in the business, will sell less than 7% as many?

Well, you might say, the Apple Watch Edition is not just a watch—it offers all kinds of digital functionality that a Rolex doesn’t. That’s true, but you don’t have to pay 10 grand to get that functionality; you can order a Sport model for $350.

Furthermore, though we have no data to prove the point, we suspect that most buyers of luxury watches are interested not only in prestige, but also in owning an heirloom, something that can be passed along to a grandchild. If that’s a motivation for buying a $10,000 watch, we’re afraid the Edition won’t measure up. As a commenter on the website Engadget so aptly put it: “[T]he thing about watches is that old ones still look good, and in some cases better, with age. As gadgets, these things (Apple Watch Editions) will age horribly. A decade old Rolex keeps its value, a decade old gadget would be like wearing the Motorola Razr on your wrist.”

So what’s a realistic sales number? Since Apple won’t release any figures at this point, we’ll have to take a guess. For that, we turn to independent researcher Ming-Chi Kuo, an analyst with a strong track record in the Apple guessing game.

In a recent note to investors from his employer (KGI Securities), Kuo wrote: “Mass production of Apple Watch began in March and will likely reach 2.3mn [ordered] by end of May.” Pretty good, but not a million a month. And of course that’s the estimate for all Apple Watches combined, “with Apple Watch Sport, Apple Watch and Apple Watch Edition representing a respective order allocation of 85%, 15% and less than 1%,” Kuo believes.

Oops. If Kuo is reasonably on target for the first three sales months (when initial enthusiasm is running high), then even at a full 1% of the total, the Edition has moved only 23,000 units. The idea that Apple will go on to sell 1 million Editions a month is not just unlikely, it’s absurd. Even 1 million a year now seems wildly optimistic.

So… if the watch really contains a half-ounce of gold, and if Apple continues at roughly an 8,000-a-month sales clip, then the company will need about 48,000 ounces of gold a year to produce the Edition. A lot of gold, to be sure, but not remotely close to that February estimate of 30% of the world’s annual production.

For those of you who may have been hoping that Apple would help drive up the gold price: sorry, it’s just not going to have any meaningful effect.