Unless you actively try to avoid such news, you’ve likely heard some of the details surrounding Apple Inc.’s (NASDAQ: AAPL) new piece of technology, the Apple Watch.
While the company is light on details regarding the new watch, bloggers and speculators are betting that it officially gets released sometime in the next month. Apple Watch comes in three models—regular, sport, and luxury—all with corresponding price tags.
Naturally, expectations are pretty high that Apple fans will buy up the watches by the millions, even though the basic model is expected to retail for US$349. The luxury edition, plated with 18-karat gold, is expected to retail for US$4,999.
For me, this seems like a huge amount of money for a watch, no matter how much gold is on it. But the company expects to sell a million of the luxury model watches per month after the release. The gold edition is expected to do particularly well in China, where there’s a large amount of demand for both Apple products and investing in gold.
Just how big of an effect will this have on the gold market? It could potentially be huge.
The impact
Based on projected sales of one million units per month and two troy ounces of gold in each watch, Apple will go through 746 tons of gold annually. That’s about 30% of the world’s current gold production. That’s a lot of extra demand.
It’s easy to see how that can start a nice feedback loop for the price of gold. Gold moves higher because Apple is a huge source of demand. Then, sales of the watch increase because consumers want exposure to gold. Many regular folks like the idea of owning gold as an investment, but have no idea where to get the physical metal.
Even if Apple’s effect on the gold industry isn’t as strong as predicted, the new watch will still help shore up the price of gold as a worst-case scenario. The laws of supply and demand indicate that.
How to play it
This could start another bull market in gold. If you’re looking for a reason to get back into the sector, it’s obvious the gold miners are the way to play this trend.
That’s because the producers have what’s called operating leverage. Essentially, their profits will rise and fall faster than the price of gold because they have so many fixed costs. The cost to mine gold at $1,000 per ounce is pretty much identical to the cost to mine it at $1,500 per ounce. As the price of the metal continues to go up, so do profits.
One way for investors to play this trend is by buying Goldcorp Inc. (TSX:G)(NYSE:GG), Canada’s largest gold miner by market cap. It’s widely regarded as one of the best operators in the sector, and management does a great job of keeping costs down. The company also pays a $0.06 per share monthly dividend, good enough for a 2.8% yield.
For investors willing to take on a little more risk, Yamana Gold Inc. (TSX: YRI)(NYSE: AUY) could be a huge winner if gold goes higher. The company has had issues keeping costs down; it had production costs of more than US$1,200 per ounce in 2014, which is one of the highest in the sector. Yamana also has more than US$2 billion worth of debt on its balance sheet, which has investors worried.
But if the price of gold moves up aggressively, Yamana will likely be one of the huge winners. The company is among the cheapest in the sector, currently trading at approximately 60% of book value. Gold increasing another 10% would help, but a 20% increase would likely get investors to stop worrying about the company’s debt and start valuing it on earnings again. The price of the commodity matters much more to riskier producers like Yamana.
It’s hard to say what effect Apple will have on the gold market, but if you hear about the luxury version of the Apple Watch doing well, chances are that gold will benefit just as much as Apple will.
