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A Golden Apple (Wrist Watch) is Coming Soon
In my recent college reunion, the first question – after the initial shock of seeing gray (or no) hair – was, “What do you DO?” When I said that I write about the markets – notably stocks and gold – they usually expressed a sense of comfort with stocks but a little squirming after the word “gold.” In a dinner with old friends, most of them well off and successful, I heard a couple of times that “gold has no useful purpose,” so “why own gold?” That’s a common complaint, especially in our relatively young nation that has fallen out of touch with the 4,000-year history of gold as mankind’s primary store of wealth and currency hedge.
“Silver, platinum and copper all have industrial uses,” they said, “but what does gold do but sit in some vault, earning no interest?” Over dinner, I didn’t really have the inclination to filibuster them on the many unique properties of gold as an alternative currency (or in industry), so I asked them a simple question:
“Do you still have your class ring?” (I held up my hand to show them my own 1967 class ring.) “Do you recall how much it cost?” They didn’t, so I said: “It cost us only $35 for over an ounce of 18 karat gold. If you melted down this class ring – which I would never do – you could get over $1,000 for the gold content alone. But as a collector’s item, in very limited supply, it’s probably worth several thousands.”
After giving their old class ring some new respect, I changed the subject to a more timely form of jewelry:
“Have you heard about the new Apple Watch?” (“Of course,” they’d say, “I can’t wait to see it.”) “Did you know that the high-end watch, coming in April, may contain up to two troy ounces of gold? If you buy an Apple watch, it looks like you might become a gold investor, despite your misgivings about gold.”
Almost everything Apple makes turns to gold, in one sense. The company has the highest stock market capitalization (that’s the total net worth of all the shares of its stock) of any company, by a factor of two. As of March 3, Apple shares are worth over $750 billion vs. the #2 company, Google, worth $388 billion.
For the time being, I’m skeptical about the watch containing two ounces of gold, since Apple is notorious for their attempt to miniaturize and lighten all their products, but even if the watch is just covered with a thin layer of pure gold, that will be a marriage of the world’s #1 brand (Apple) and the #1 form of money.
This is all speculative, based on the demand for most Apple products in the past, but if Apple is able to sell about one million of their gold watches per month over the first year, and each watch contains two ounces of gold, then 24 million of new gold demand in a year would total nearly 750 metric tons. Each year, the total of newly-mined gold is less than 3000 metric tons, so Apple could account for about one fourth of all newly-mined total, all from a completely new and unique source of “industrial” demand.
Other New Forms of New Gold Demand Coming in 2015
China is closed-mouthed about its central bank gold holdings. The last time they told us about their official gold holdings was 2009, when they said their gold hoard had risen to 1,054 metric tons, up from 600 tons in 2003. Almost everyone agrees that China now owns a lot more than 1,054 tons of gold, but the real total is anyone’s guess. A more solid statistic is China’s foreign exchange holdings, which now exceed $4 trillion, the largest cash hoard in the world. If the Chinese government made a strategic decision to hold just 10% of that total in gold (a modest percent compared with the U.S. or Europe), that would translate to $400 billion – or more than 10,000 metric tons, at today’s prices. With the U.S. Treasury holding about 8,000 metric tons of gold, 10,000 tons would make China #1 in gold holdings.
The rest of China – mostly private investors – probably own well over 30,000 metric tons of gold. In the first six weeks of 2015, leading up to the Chinese New Year celebrations in late February, investors and celebrants bought (withdrew) 374 metric tons of gold from the Shanghai Gold Exchange (SGE). That’s about 17% more than the record high demand set in the same period a year ago. Demand slowed during the New Year itself, but later on in 2015 the SGE is planning to launch a new “gold fix,” denominated in the Chinese yuan. The daily price fix will be linked to the SGE’s new one kilogram (32.15 Troy ounce) gold contract, which they intend to be the trading benchmark for foreign banks and international traders.
European demand is soaring as well, due to the falling euro and the threatened exit of Greece from the euro-zone. Gold has been rising far more rapidly in euro terms than in U.S. dollar terms, due to the strong U.S. dollar, but the fear that Greece could abandon the euro and go back to its presumably inflationary drachma has sent investors away from Greek euro bonds. Gold demand is soaring throughout Europe, even in Britain (not part of the euro-zone). The European precious metals dealer BullionByPost said it has seen the “highest demand for gold in its six-year history,” according to London’s Sunday Telegraph. In addition, the German coin dealer Degussa reported a 35% increase in gold coin sales in January alone.
Indian demand has been frustrated by legal restrictions and high fees on gold imports, but India has a Millennia-old reverence for gold, which no government can curb. As long as India’s import fees remain in place, smuggling will increase (smuggling reached an estimated 200 tons in 2014), so the Indian government will have to decide if they want a smaller percentage of a bigger pie, or zero percent of a smaller pie. In their first move toward gold import liberalization, India repealed the 80/20 rule, which required gold importers to sell 20% of their imports overseas, to help India’s balance of payments deficit.
India’s Akshaya Trotiya festival is considered an auspicious time for gold gift giving. Since it arrives on April 21, Indian jewelers dealers will need to stock up on gold in one form or another fairly soon.
The Gold ETF market is also expanding in 2015. In the first two months of this year, assets in the largest gold ETF (GLD) have grown by 62.23 metric tons. Analysts at Barclays recently say the gold held by all gold exchange-traded products (ETPs) totaled 1,791 metric tons at latest count. It’s likely that U.S. paper-gold traders will be the last passengers to get on board, should a new gold bull market take off.
The leveraged paper gold market may be the “tail that wags the dog,” but physical gold demand in China, India, Europe – and maybe even in Apple Watches – will eventually determine gold’s future price. In the meantime, the fact that most of my college classmates (averaging age 70) wince at the idea of owning gold should be a “contrarian’s dream,” the perfect time to buy a position in gold at attractive prices.
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