Get ready for the tech press to flip out when Apple announces the retail price for the gold Apple Watch Edition model. Apple critics have always roasted the company for selling products that are more expensive than they should be, and they frequently use this as a wedge topic to criticize buyers. But the “18-karat gold” Apple Watch Edition will set a whole new bar with a sales price of $10,000. The funny thing in this case is that Apple is perfectly right to be charging that much!

Do you disagree? Check out my counterpoint, “The Case Against the $10,000 Gold Apple Watch Edition“

Gold is Expensive

Let’s start with a little backgrounder in gold. Everyone has a vague sense that gold is expensive. Even rabid Internet trolls have seen the banner ads and heard about that in the news. But most people don’t understand just how expensive even a little bit of gold is. So this is a good place to begin the discussion.

Update: My calculations were wrong! Also, this was a bit “back of the envelope.” Now that it has some readership I realize I should go back and fix the calculations in the article to be more realistic…

Here are the basic facts:

Gold currently sells for between $1,200 and $1,300 per troy ounce and has been over $1,000 per troy ounce for the last five years. 18-karat gold contains 75% pure gold, and that term is regulated by law. One ounce of 18k gold occupies about 1.8 cubic centimeters of volume since a typical 18-karat gold alloy weighs about 16.5 grams per cc. 18-karat gold currently sells for $29.11 per gram, $905 per troy ounce, or $480 per cc.

.25 cc of 18k gold is about enough to construct a watch buckle and .75 cc gets you a deployant clasp. It takes a few more to build a watch case, anywhere from 1.5 to 8 cc depending on the size and thickness of the case. So the buckle is worth $120-$360 and the watch case $720 to $3800 just as raw gold. This is why gold watches generally sell for a lot more than $6,000!

Gold Watches are Expensive

Let’s apply this to a watch case. Imagine you wanted to create a rectangular case 42 mm high by 36 mm wide by 10 mm deep. If it was solid, this would equal 15.12 cc of volume. But it’s a watch case, so you have to leave room for the movement, dial, case back, etc. So let’s just leave 5 mm of thickness all around, making a hollow rectangle. This equals 6.8 cc (42 x 36 x 10 – 32 x 26 x 10). Therefore, the raw gold to make just the case of this hypothetical watch would cost $3,200 as of this writing.

Now let’s consider the same shape but just 2 mm thick. That’s 2.9 cc of gold, worth $1,400. Pick your thickness and you’re still looking at thousands of dollars worth of gold.

How does this translate in the real world? Let’s look at the retail price of some watches that are available in both stainless steel and 18-karat gold.

The Cartier Tank MC measures 44 mm by 34 mm by 9.5 mm thick: $15,000 extra (list) for 18k gold Cartier Tank MC in stainless steel: $7,000 list, $5,800 street Cartier Tank MC in 18k pink gold: $22,000 list, $18,200 street The Jaeger-LeCoultre Reverso Squadra Hometime measures 50.5 mm by 34.9 mm by 14 mm thick: $14,750 extra (list) for 18k gold Jaeger-LeCoultre Reverso Squadra Hometime in stainless steel: $8,550 list, $6,800 street Jaeger-LeCoultre Reverso Squadra Hometime in 18k pink gold: $23,300 list, $18,400 street

This list could go on and on, but the gist is simple: 18-karat gold cases cost a lot more than stainless steel. In fact, it’s pretty much impossible to find a gold watch for under $10,000 in any size and from any manufacturer. Even tiny quartz ladies watches like the tiny Chopard Happy Sport Mini sells for $11,000! Most of the bargains commenters have pointed to are either 14-karat or less, very slim and small, or long out of production and with outdated pricing.

Then there’s the bracelet. Swap a gold bracelet for a leather strap and you are looking at an extra $20,000. Adding a gold bracelet to that Jaeger-LeCoultre bumps the price to $42,900!

Certainly there is quite a bit of profit in luxury watches, but one simply cannot deny the raw material value in a gold watch case. And the gold market is liquid like stocks and other commodities: There are plenty of buyers and sellers of gold, and plenty of reserves, so no company, no matter how strong, can expect favorable pricing from their suppliers.

Another reason companies charge so much for gold watches and jewelry is as a hedge against volatility. They can’t price near the commodity price because they have to set a price and stick to it all year long. So they generally price somewhat higher than they would, even taking into consideration all the rest of the materials, labor, distribution, and profit in a watch.

The Apple Watch Edition Will Cost $10,000

There’s a reason I picked those two watches for my comparisons: Both are similar in size and shape to the 42 mm Apple Watch. The Cartier is a little smaller and the Jaeger-LeCoultre is a little larger, but both represent a traditional watchmaker’s gold-cased square-ish offering in the space. And both cost more than $20,000, with much of that price going to the gold case and matching buckle. And Jony Ive recently said that the historic Cartier Tank was one of his inspirations for the Apple Watch design!

Apple would be crazy to sell the Apple Watch Edition for $20,000, though. That’s not going to happen. So they’re likely to find ways to reduce the cost dramatically.

First, as we can see, the Apple Watch case is highly rounded in all three dimensions. Although questionable from an esthetic standpoint, this reduces the amount of material required by quite a lot. Second, Apple Watch has a large sapphire crystal front and back with the display, sensors, and such. Third, the interior frame is likely made of steel or aluminum, not gold, to reduce cost and increase commonality with the aluminum and steel versions.

Could it be gold plated? No. Numerous reports state that it is a solid gold case. Although Apple has not apparently used the word, “solid” in their press releases, they do claim it is “crafted from 18-karat gold” and nowhere does it say it is plated or “gold filled” (the industry term). There are laws covering descriptions of metal content for jewelry and Apple cannot break these any more than Tiffany could.

Apple says that the Apple Watch will start at $349 for that aluminum Sport model, and many bloggers have reported the price for the steel Apple Watch to be roughly $1,000. It is reasonable to assume that the gold Edition model will sell for substantially more than this, with many suggesting $4,000 or $5,000. But remember that this price would only cover 4 or 5 ounces of gold! Even with thin walls and a steel frame, it’s hard to see how Apple could make a solid 18-karat gold case and buckle for a 42 mm watch with just 3 ounces of gold.

Gold is soft, but Apple claims that their special gold is twice as hard as “standard gold”. Taking that at face value, perhaps they reduced the thickness of the case commensurately, cutting the amount of gold in half versus a standard rectangular watch. This still leaves a few thousand dollars of material value in the case. The Apple Watch Edition will come in 38 mm and 42 mm sizes, a difference of about 20% in terms of case volume. So the smaller model could sell for 20% less still.

My prediction is that the 42 mm Apple Watch Edition will retail for $9,999 with the 38 mm Apple Watch Edition retailing for $7,999. This covers the cost of the gold case, the internals, manufacturing, sales, and profit, and yet does not leave Apple subsidizing the world gold market by selling at a discount or cheating with a too-thin or plated case. I will be shocked if the price is $4,999, but I suppose it’s possible with some finagling and if that’s the smaller model. And it will not be any less than that.

Bonus prediction: Given the very high price of the Apple Watch Edition, I predict that availability will be quite limited. Apple will likely create special store-within-a-store spaces in certain Apple Store locations for the Edition. I further expect them to open special standalone Apple Edition Boutiques to sell the Watch Edition, accessories, and perhaps other future high-end products.

Update!

Needless to say, many people disagree with me. And now that @Gruber Fireballed this post, I imagine I’ll hear from lots of them real soon!

The gist of the disagreement lies in the amount of gold needed for the watch case. I assumed it would be quite thick (read sturdy) and would contain upwards of 130 grams of 18k gold. Then there’s the strap lugs and buckle which would likely contain another few dozen grams. But @GAK_PDX (and others, though he was most visually eloquent) suspects it contains much less gold.

For fun, I took my Apple Watch models and used SW and some basic assumptions to figure the gold content. 29.16g: pic.twitter.com/WGEnjtj1Yh — Greg Koenig (@gak_pdx) February 19, 2015

I think this number is way too low, but it’s a good lower bound if the case was very thin and completely hollow. And it puts the raw gold at about $849 at $29.11 per gram of 18k gold. Although this is admittedly much, much lower than my estimate, it still illustrates my point that the Apple Watch Edition is not going to be cheap. And I think he’s way off but time will tell who is right and who is wrong.

Another argument is based on this 2006 analysis of a gold Rolex watch. Right off the bat one should point out that gold cost $400/oz when it was written and that watch includes a gold bracelet as well, something Apple is apparently not going to do with the Edition. That Rolex case contained 18.5 grams of gold alloy, but it’s much, much smaller than the Apple watch and it’s circular to boot! A 34mm circle is 107mm in circumference, while the 42mm Apple Watch is 156mm in circumference. Use the magic of math to scale the Rolex up into a 42mm rectangle and we’re at 27.75 grams. But that case is also much thinner since we excluded the bezel, and the Apple Watch is pretty slab-sided. So we can probably double this safely and come out with $1,615 of gold in my mangled square Rolex case.

So there are lower estimates than mine for the amount and value of the gold. I can accept that. But let’s take a step back and think about the final price. Even if it contained less than $1,500 of gold, how much would it sell for? Certainly not $2,000 or $3,000. You still have to account for the cost of everything else, plus the intangibles of manufacturing and distribution. And profit for Apple (and a hedge against the volatility of the price of gold). So we’re back at the $4,000-$5,000 estimate others have made. As Greg Koenig tweeted, and Forbes reported, “If anyone thinks Apple is charging less than $5k for the Edition, they are smoking crack.”

Regardless of the total, it’s important to realize that the price of gold is in the driver’s seat when it comes to pricing the Apple Watch Edition.

I’d love to be wrong, and I look forward to updating this piece. Thanks for reading!

Tags: Apple