Using watchOS 1 or 2, I would like to be able to access either favorite contacts or all contacts on my watching using the picture. I know that I would be have to use the setItem call but I still don't know how to access the contacts from the Apple Watch itself.
There isn't anyway to do exactly what you want in this case. However, you can use one of the ways explained below:
1- Get contacts in the iPhone from internal libraries, and then use WatchConnectivity framework to transfer data from iPhone to Apple Watch.
2- Set up a cloud service, and then move contacts there from the iPhone. User can see them in Apple Watch whenever it is connected to the Internet.
3- Ask user to specify contacts on Apple Watch once, and then show them to the user.
4- Open the contacts of iPhone programmatically in Apple Watch, which is a question answered here.
As you saw, there is no comprehensive way to see contacts directly on Apple Watch without iPhone help, but these ways may help you. WatchKit library is growing every month and every year, so wait for the new releases.