When acquiring gold it is normal to think of it in terms of dollars per ounce.  Many buyers of gold will make a one time purchase as the price is rising and then wait for the price to go up before selling.  Very few investors will actually buy when the price is falling as it is scary.  Fortunately for anyone buying gold over the past 11 years, it has been in a bull market and the previous strategy probably worked.  Anyone who has invested in stocks, bonds, gold etc knows that prices rise and fall frequently, even if the asset is in a bull market.

Fortunately there is a way to capitalize on these price fluctuations, and it’s called dollar cost averaging.  The way this strategy works is to buy at regular intervals (or irregular intervals) regardless of price.  This way you can average the price paid over time.

Here is how it works.  Let’s say that you had money set aside in your portfolio for gold and you bought 10oz of bullion gold coins in September for $1,900/oz ($19,000), and then you bought another 10oz of gold November for $1,680/oz ($16,800).  Your average cost per ounce is $1,790/oz.  If this month you decided to buy another 20oz when gold hit $1,580/oz ($31,600) then your new average cost would be $1,366/oz (19k+16.8k+31.6k/40oz).  Now you would own 40oz of gold at $1,685/oz.

If you would have bought all 40oz at the beginning you would own all of them for $1,900/oz, but by dollar cost averaging you now own them al at $1,685/oz.  If gold only was rising, this strategy would not work very well as you would be paying higher and higher prices.  But in years where there has been extreme volatility it can bring down the overall cost of your investment, essentially reducing risk.

It is very difficult to time markets.  Therefore buying low and selling high can be difficult to do.  But if you can buy on a weekly, monthly, quarterly basis or even when you notice prices falling, you can reduce your risk over time.

This strategy is employed all the time by average investors.  Think of a 401k, the most popular investment vehicle out there.  401k’s are contributed to typically every paycheck, this by nature dollar cost averages automatically.

If you bought gold when it was at $1,900/oz it would make sense to buy more gold today when it is at $1,592/oz as it will bring down the overall cost per ounce of your initial purchase.