With US$180-200 billion cash in the bank, Apple is sitting on a growing pile of paper dollars that dwarfs the reserves of many medium sized nations. Having so much idle cash with nowhere to go is not a good look so why not invest in a scarce precious metal that is both a hedge against inflation and achieves multiple returns when turned into jewellery?
Apple believes that it can sell 1 million gold Apple Watches a month – 12 million a year – to the high net worth luxury market. At 2 ounces of gold per watch, this means that Apple would need to buy nearly 750 tonnes of gold per year -approximately one third annual global production and more than the combined 650 tonnes production of all the mines in the two biggest gold producing nations, China and Australia.
Sourcing 750 tonnes of gold per year would also make Apple the second, third or fourth biggest gold buying entity in the world. Only the nations of China, India and possibly Russia import more gold each year than that.
According to some reports, Apple design guru Jony Ives, the son of a silversmith, claims to have developed a new type of gold alloy for the premium Apple Watch that’s three times as strong as 18 carat gold. On the surface, this would appear to be a distraction from the issue of supply because 18 carat gold has already proven to be more than adequate for premium watch brands such as Rolex.
A base model with an aluminium casing will sell for about US$350, which based on iPhone and iPad figures will yield about a 40% net profit of about US$140 per watch sold.
A premium model with a gold casing and band containing 2 ounces of gold (worth about US$2400 at today’s prices) would reportedly sell for about US$10,000 which, given the electronics of both models will be much the same, will yield a net profit somewhere north of US$7,000.
If the above figures are correct and Apple achieves its sales target of 12 million gold Apple Watches per year, this would add US$120 billion of revenues and about US$84 billion net earnings to the company’s already to die for balance sheet.
Of course, no one can enter the gold market with the intention of buying the equivalent of one third of global production without affecting the price. Apple, with its massive cash reserves, may able to strike deals directly with global gold miners outside of China (which doesn’t allow gold exports). Otherwise, it will have to source its gold on commodities markets such as the COMEX, using futures contracts to lock in prices. Regardless of the means, Apple may find 750 tonnes a difficult order to get filled.
However, what if Apple is wrong and it can’t offload 1 million gold watches a month to would be buyers from the glitterati set? What if Apple purchases 750 tonnes of gold over the course of the next 12 months, at a cost of nearly US$30 billion, and finds that there is scant demand for gold Apple Watches?
Well then if there is no demand for its gold watches Apple will find that all it has succeeded in doing is converting about 15% of its paper dollar denominated cash reserves into gold over the course of the year. Wait a minute, isn’t that what many countries around the world are doing these days?