Weekend Economists: Spock Lives! March 6-8, 2015

[Demeter]

24. Apple To Consume 1/3 Of World’s Annual Gold Supply?

http://www.zerohedge.com/news/2015-03-06/apple-consume-13-world%E2%80%99s-annual-gold-supply

Apple may consume up to 746 metric tonnes of gold per year in the production of its new luxury Apple watch, due for release in April. This equates to roughly one third of gold’s total annual global mine supply. The watch will come in three varieties - the entry level "Sports" model, the mid-tier "Apple Watch" and the upper end "Apple Watch Edition" which the company says will be made of 18k (75% pure) gold and is estimated to retail from anywhere between $4,000 and $10,000.

Apple (APPL) have ordered their manufacturing plants in Asia to produce between 5 and 6 million units. Around half of these will be the Sports model which is expected to retail for $349. Around one third of the order will be made up of the mid-range watch leaving an estimated one sixth of the order to be comprised of the gold edition. Tidbits, the independent blog discussing all things Apple have estimated that each watch will use 2 ounces of gold. While this may be an over-estimation - a watch made of 75% gold would be be quite bulky if it used a full two ounces - it is not impossible, especially if buyers were to opt for a gold bracelet with the watch. Apple's reported expectation to shift one million units of the Edition model will be a tall order. In the end it will probably come down to the price. Even at the lower end estimate of $4,000 it's hard to imagine Apple shifting one million units each month.

However, Apple's ability to generate a buzz or hype, depending on your perspective, cannot be under-estimated. While details concerning the actual function of the Watch do not suggest a "must-have" motivation for buying it - at least on technological grounds - Apple raving fans may create the massive demand the company expects. It does not have the element of indispensable usefulness that one could associate with the iPhone or iPad. The major attraction of the ‘Watch’ will be a fashionable one and be about being part of the Apple ‘tribe.’ This is not a terrain in which we would normally expect a technology company to operate in comfortably. However, Apple have recruited the former CEOs of Yves Saint Laurent and Burberry to make up for their lack of expertise. It will be interesting to see how this synergy works out. We wonder how many people would be willing to shell out for a jewelry and technology hybrid with an expected usefulness of roughly five years when the most expensive element in it is its gold content. These types of purchases are normally made with a view to it being useful and having sentimental value for a lifetime. Perhaps Apple will offer upgrades where the interior of the watch can be replaced while keeping the same gold exterior.

If the Watch Edition is to be successful it will require quite a leap in the psychology of jewelry buying. However, we would be hesitant to bet against the capabilities of the Apple marketing machine and the loyalty of Apple buyers in this regard. Should the Watch Edition retail at $4,000 it should leave Apple reasonable room to manoeuvre in the event of a spike in the price of gold. If Apple were to use a full two ounces of gold it would currently cost them roughly $2,400. Assuming other costs are not much greater than those involved in producing the Sports model which is expected to retail at $349, we can assume that Apple will have a buffer of around $1,200, to absorb a gold price spike of 50%. These figures don't include marketing costs or expected profits. The CultofMac blog speculates that Apple would need to wrest 45% of the share of luxury watches from the likes of Rolex and other high-end Swiss watches to meet its target. It is, however, likely that Apple will attract lot of customers who would not normally be in the marketplace for luxury watches.

One million units per month using 2 ounces of gold would amount to the 746 tonnes of the metal mentioned above. While Apple may not use that amount of gold per unit and may not shift its expected volume of units, what is important is that there is a major new buyer in the gold market. Where Apple goes - others may follow creating additional sources of demand. The ramifications for the gold market based on these estimates are significant. Currently, China is already buying more than 1,500 metric tonnes annually or more than 50% of global supply. Creditor nation central banks, particularly the Chinese, are diversifying their gold reserves and accumulating large amounts of bullion on an ongoing basis. Many central banks, including Germany, Austria, the Netherlands, Belgium, are repatriating their own gold reserves from the Federal Reserve and the Bank of England. Many analysts believe that this is forcing their counter-parties into the market to regain gold that should be in their possession but was dumped onto the market as part of the gold-suppression scheme.

With an enormous buyer like Apple coming into the market, supply is going to have to come from existing stocks of gold. That is to say, supply does not exist to meet this new demand...

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