Gold Falls, Analysts Panic & Apple Reinvents Gold

Gold Falls, Analysts Panic & Apple Reinvents Gold

Gold prices had their biggest one-day drop in over a year last Friday and it has analysts writing panicky and poetic things and traders betting in both directions.  

Gold Falls, Analysts Panic & Apple Reinvents Gold
Gold Falls, Analysts Panic & Apple Reinvents Gold

Meanwhile, Apple (being Apple) is responding to falling gold prices by inventing a new 18K gold "alloy" to use in their luxury Apple Watch Edition. Leave it to Apple to invent a new gold alloy that uses less gold than the old kind but still gets to be called 18 karat. No word on whether the old kind of 18K gold will now be known as Windows Vista Gold.

Howie Lee, investment analyst at Philip Futures wrote his subscribers, "Gold has fallen from grace and its ascent to $1,306 in January now looks to be a false dawn and a distant memory." His Lord of the Rings analysis continued, "no amount of buying-on-dips will likely be sufficient to rescue gold from its slide south," adding that his 2015 target of $1,100 is now firmly in sight. It is.

Other analysts stumbled over their words in their excitement. Ric Spooner, chief market analyst at CMC Markets, says it's the "worst case of all worlds for gold."

If we look at the chart, $1100 is the 50% retracement from the September, 2011 highs around $1900/ounce. It's a logical support level to expect. Below that is the Fibonacci 38% mark at $920, which is certainly possible unless something unusual happens to revive buying interest in gold. My two candidates for "something unusual" are India and Apple, Inc.


I wrote a couple of weeks ago about the Indian wedding season and its effect on gold prices. India buys fully 25% of the world's annual gold production (with China not far behind), both for investment and jewelry (sometimes the latter is the former as well). The day after that article, the Indian government reversed its decision to lift import curbs. This slowed gold buying this year, but India's gold story is bigger than just this seasonal trend.

An estimated $1 trillion in gold is stashed away in safes, cupboards, and temple vaults across the subcontinent. The government is working on ways to re-bank that gold and create a way to issue bonds collateralized on it. If that happens, the effect on global markets would be multifaceted and major. But it's not about to happen soon. It is India, after all.

With India out of the short-term picture, the other potential gold buyer in the news lately is Apple, because of the upcoming luxury version of their new watch, simply called Apple Watch Edition. Trusting that none of its millions of expected buyers will say, "Is there a non-watch edition?" Apple CEO Tim Cook announced that it will be covered in 18-karat gold and that Apple expected to sell about a million of them a month.

This got some longtime Apple-watchers to do quick calculations of how much gold it would take to cover all those watches. The result was staggering: about 746 metric tons or 30% of the world's annual production. That would mean that about 75% of the world's annual gold production would go to India, China, and the wrists of Apple customers seeking a unique fashion statement to show off to their fellow Apple Watch-wearing friends. Really?

How would that work exactly? Would Apple try to beat two of the world's biggest economies in a buying war? That would be hard to imagine. To add to the speculation that Apple was about to hoard the world's gold, Brikk, the makers of the $8,000 24K gold-plated iPhone 6, announced a$75,000 diamond-encrusted Apple Watch, for those in the 1% who want to answer the question, "What time is it?" with "Whatever time I tell you it is!"

Before it turned into a larger argument about inequality as reflected in Apple's pricing, it turned out Apple had, as you might expect, a more elegant or at least crafty solution. They had invented a new "alloy" of 18 karat gold, which uses less actual gold and is cheaper to make. Technically, Apple’s gold is a metal matrix composite:

Instead of mixing the gold with silver, copper, or other metals to make it harder, Apple is mixing it with low-density ceramic particles. The ceramic makes Apple’s gold harder and more scratch-resistant—which Tim Cook touted during the September announcement—and it also makes it less dense overall.

So Apple has found a way to make a legitimately 18-karat gold watch, at a price ($2000-3000) that still seems within reach of, well, people who buy 2-3000 dollar smartwatches. That may not be a million people a month, at least not for long, but it's likely to be a profitable number and one that will still leave plenty of gold on the market for China, India, and even the rest of us.

Which means that the Apple Watch probably won't be causing gold prices to reverse direction and rally anytime soon, either. But it will probably have an app that shows you how far the price of gold fell.

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