Dollar Cost Averaging
Method of purchasing assets in which you divide your capital in equal dollar amounts and spread the purchase over time - perhaps over several months. Our studies show that the dollar cost averaging is not advisable for purchasing gold nor silver.
Definition
We know that many of our colleagues advocate using the dollar cost averaging when making your gold and silver purchases. This means buying bullion for the same amount each time over a defined period – for example $1000 each month for 6 months. We don’t. The final decision is always up to you, however there is no clear evidence that this strategy increases one’s profits. On the contrary – there are studies that show that this strategy decreases one’s profits and reduces the standard deviation of returns (some define that as risk). For us, precious metals investors, the real risk is to be out of the market, not to be in it, because of the extremely favorable fundamental situation.
Other studies also confirm that the dollar cost averaging does not work, and should be viewed as marketing aiming to sell particular asset to nervous investors. Think about it – the value of almost all assets rises in the very long term, therefore why would it make sense ON AVERAGE to wait with one’s purchase? In other words - isn't it strange when someone tells you that gold/silver are going MUCH HIGHER and in fact they can explode any day, but then suggests you that it is a good idea to wait with purchasing metals (because dollar cost averaging means that you don't purchase PMs right away - you wait for instance a month to purchase some, then again you wait another month, and so on and so forth)? Generally, this might suggest that this person doesn't really believe in the bull market in PMs but if that is the case why suggest buying PMs at all?
The stronger the bull market in a particular sector is, the more costly the dollar cost averaging becomes. It may be more difficult from the psychological point of view for one to purchase all of their bullion at once, but in the end it should prove profitable in most cases. Remember that saying ‘the harder the decision is, the more profitable it is’?
Besides, this is a secular bull market in the precious metals and during its last phase gold and especially silver will move up very fast. Do you want to risk not-being fully invested when that happens?
Dollar Cost Averaging in Gold & Silver
Just to show you what may happen in such a bull market, if one decides to put off the purchase of the asset in question with Dollar Cost Averaging, we have made a sample simulation regarding silver. It spans seven and a half years (Jan. 2002 – Jul. 2011) and is intended to compare two approaches to buying the white metal: all at once and DCA. Each row contains the price of silver on the first trading day of the month and three different values. First one of them (column 3) shows gains one would have made buying $100,000 worth of silver two years earlier in a single purchase. Second one (column 4)contains returns on buying the same $100,000 worth of the white metal for that same 24 months, each month for the amount of $4,166,67 (= $100,000/24). Finally, the fifth column presents the additional profit one would have made following the DCA approach.
Before we continue, please note that there are other ways to time one's purchases than DCA and one of them is to time the purchases close to the major turning points (i.e. major bottoms). If you'd like to stay updated on the situation in the precious metals market (including timing of the bottoms and tops), we invite you to sign up for our gold mailing list, which comes with 7 days of free access to our premium Gold & Silver Trading Alerts as a starting bonus. It's free and if you don't like it, you can easily unsubscribe. Sign up using this link today.
Moving back to the main topic, as you can see below, these “gains” were seldom positive – out of 90 cases where we could measure them, only 13 times (14.44%) DCA provided additional returns. So most of the time our hypothetical investor would have lost quite a substantial amount of money following the Dollar Cost Average approach.
No-DCA vs. DCA gains table
Date |
Price |
Gain (2 years, no DCA) |
Gain (2 years, DCA) |
Additional gain thanks to DCA |
7-1-2011 |
$33.85 |
$147,985.35 |
$66,976.72 |
-$81,008.63 |
6-1-2011 |
$37.95 |
$139,281.21 |
$93,004.75 |
-$46,276.46 |
5-3-2011 |
$43.61 |
$258,930.04 |
$132,578.93 |
-$126,351.11 |
4-1-2011 |
$37.63 |
$189,907.55 |
$108,599.47 |
-$81,308.08 |
3-1-2011 |
$34.37 |
$161,567.73 |
$97,259.86 |
-$64,307.87 |
2-1-2011 |
$28.32 |
$127,835.88 |
$67,863.57 |
-$59,972.31 |
1-4-2011 |
$30.67 |
$176,805.05 |
$89,159.81 |
-$87,645.25 |
12-1-2010 |
$28.74 |
$190,010.09 |
$85,173.46 |
-$104,836.64 |
11-1-2010 |
$24.91 |
$147,860.70 |
$66,657.41 |
-$81,203.29 |
10-1-2010 |
$21.95 |
$78,745.93 |
$50,134.96 |
-$28,610.97 |
9-1-2010 |
$19.47 |
$43,372.61 |
$34,979.30 |
-$8,393.31 |
8-2-2010 |
$18.11 |
$2,956.23 |
$25,674.03 |
$22,717.80 |
7-1-2010 |
$18.65 |
$6,207.29 |
$29,679.98 |
$23,472.69 |
6-1-2010 |
$18.30 |
$8,540.93 |
$27,602.18 |
$19,061.26 |
5-4-2010 |
$18.71 |
$12,439.90 |
$30,979.36 |
$18,539.45 |
4-1-2010 |
$17.69 |
$5,675.03 |
$24,075.31 |
$18,400.28 |
3-1-2010 |
$16.50 |
-$18,154.76 |
$14,972.36 |
$33,127.12 |
2-1-2010 |
$16.23 |
-$5,584.64 |
$12,858.30 |
$18,442.94 |
1-4-2010 |
$17.17 |
$15,003.35 |
$20,019.90 |
$5,016.55 |
12-1-2009 |
$18.72 |
$35,064.94 |
$32,315.58 |
-$2,749.35 |
11-2-2009 |
$16.58 |
$15,459.61 |
$17,833.92 |
$2,374.31 |
10-1-2009 |
$16.55 |
$20,145.19 |
$18,460.09 |
-$1,685.10 |
9-1-2009 |
$14.74 |
$21,868.54 |
$6,415.82 |
-$15,452.72 |
8-2-2009 |
$14.29 |
$11,902.90 |
$3,662.99 |
-$8,239.91 |
7-1-2009 |
$13.65 |
$9,462.71 |
-$585.44 |
-$10,048.15 |
6-1-2009 |
$15.86 |
$17,220.99 |
$16,227.79 |
-$993.20 |
5-1-2009 |
$12.15 |
-$8,886.39 |
-$11,330.69 |
-$2,444.30 |
4-1-2009 |
$12.98 |
-$9,167.25 |
-$5,655.41 |
$3,511.84 |
3-2-2009 |
$13.14 |
-$3,240.06 |
-$4,627.46 |
-$1,387.40 |
2-2-2009 |
$12.43 |
-$3,718.05 |
-$9,935.69 |
-$6,217.64 |
1-2-2009 |
$11.08 |
-$20,000.00 |
-$20,550.75 |
-$550.75 |
12-1-2008 |
$9.91 |
-$19,822.01 |
-$29,766.16 |
-$9,944.16 |
11-3-2008 |
$10.05 |
-$13,212.44 |
-$29,324.48 |
-$16,112.04 |
10-1-2008 |
$12.28 |
-$3,686.27 |
-$13,795.84 |
-$10,109.57 |
9-1-2008 |
$13.58 |
$19,594.89 |
-$3,853.54 |
-$23,448.43 |
8-1-2008 |
$17.59 |
$53,624.45 |
$26,771.63 |
-$26,852.82 |
7-1-2008 |
$17.56 |
$45,726.14 |
$28,460.68 |
-$17,265.46 |
6-2-2008 |
$16.86 |
$21,120.69 |
$24,219.84 |
$3,099.15 |
5-1-2008 |
$16.64 |
$43,634.01 |
$24,417.02 |
-$19,216.99 |
4-1-2008 |
$16.74 |
$70,816.33 |
$28,115.40 |
-$42,700.93 |
3-3-2008 |
$20.16 |
$106,345.96 |
$58,720.59 |
-$47,625.36 |
2-1-2008 |
$17.19 |
$90,154.87 |
$39,094.10 |
-$51,060.77 |
1-2-2008 |
$14.93 |
$79,555.02 |
$24,121.94 |
-$55,433.08 |
12-3-2007 |
$13.86 |
$83,941.61 |
$18,723.97 |
-$65,217.64 |
11-1-2007 |
$14.36 |
$94,711.86 |
$26,953.27 |
-$67,758.60 |
10-1-2007 |
$13.78 |
$100,948.21 |
$25,987.60 |
-$74,960.61 |
9-4-2007 |
$12.10 |
$66,827.59 |
$13,406.62 |
-$53,420.96 |
8-1-2007 |
$12.77 |
$81,908.83 |
$23,148.51 |
-$58,760.32 |
7-2-2007 |
$12.47 |
$68,970.19 |
$23,129.19 |
-$45,840.99 |
6-1-2007 |
$13.53 |
$97,518.25 |
$37,658.93 |
-$59,859.32 |
4-2-2007 |
$13.34 |
$87,684.73 |
$39,328.46 |
-$48,356.27 |
3-1-2007 |
$14.29 |
$96,831.96 |
$53,341.28 |
-$43,490.67 |
2-1-2007 |
$13.58 |
$102,686.57 |
$50,001.11 |
-$52,658.45 |
1-3-2007 |
$12.91 |
$102,034.43 |
$46,851.90 |
-$55,182.53 |
12-1-2006 |
$13.85 |
$79,520.41 |
$60,857.80 |
-$18,662.61 |
11-1-2006 |
$12.36 |
$70,718.23 |
$46,499.11 |
-$24,219.12 |
10-2-2006 |
$11.58 |
$69,298.25 |
$40,141.45 |
-$29,156.79 |
9-1-2006 |
$12.75 |
$89,450.22 |
$58,027.91 |
-$31,422.31 |
8-1-2006 |
$11.36 |
$71,009.04 |
$43,696.51 |
-$27,312.53 |
7-5-2006 |
$11.45 |
$94,893.62 |
$48,852.63 |
-$46,040.99 |
6-1-2006 |
$12.05 |
$95,299.84 |
$60,623.59 |
-$34,676.25 |
5-2-2006 |
$13.92 |
$128,196.72 |
$90,891.77 |
-$37,304.95 |
4-3-2006 |
$11.59 |
$45,906.80 |
$60,783.56 |
$14,876.76 |
3-1-2006 |
$9.80 |
$45,616.64 |
$37,910.95 |
-$7,705.69 |
2-1-2006 |
$9.77 |
$57,453.67 |
$39,882.68 |
-$17,570.99 |
1-3-2006 |
$9.04 |
$51,297.07 |
$31,568.23 |
-$19,728.84 |
12-1-2005 |
$8.32 |
$55,130.60 |
$23,313.68 |
-$31,816.91 |
11-1-2005 |
$7.54 |
$48,913.04 |
$13,784.12 |
-$35,128.93 |
10-3-2005 |
$7.38 |
$43,902.44 |
$13,197.27 |
-$30,705.17 |
9-1-2005 |
$6.86 |
$34,148.73 |
$6,638.76 |
-$27,509.97 |
8-1-2005 |
$7.25 |
$41,601.56 |
$14,516.92 |
-$27,084.64 |
7-1-2005 |
$7.02 |
$54,116.36 |
$13,138.82 |
-$40,977.54 |
6-1-2005 |
$7.38 |
$64,000.00 |
$21,607.47 |
-$42,392.53 |
5-3-2005 |
$6.85 |
$46,995.71 |
$14,832.30 |
-$32,163.41 |
4-1-2005 |
$7.11 |
$60,112.68 |
$21,611.77 |
-$38,500.90 |
3-1-2005 |
$7.26 |
$57,483.73 |
$26,659.97 |
-$30,823.77 |
2-1-2005 |
$6.70 |
$38,286.89 |
$18,485.34 |
-$19,801.56 |
1-4-2005 |
$6.39 |
$34,810.13 |
$14,453.60 |
-$20,356.52 |
12-1-2004 |
$7.72 |
$73,663.48 |
$41,255.43 |
-$32,408.01 |
11-1-2004 |
$7.24 |
$59,295.93 |
$35,029.26 |
-$24,266.67 |
10-1-2004 |
$6.84 |
$51,243.78 |
$29,704.24 |
-$21,539.54 |
9-1-2004 |
$6.73 |
$50,727.88 |
$29,732.02 |
-$20,995.87 |
8-2-2004 |
$6.64 |
$46,255.51 |
$29,924.43 |
-$16,331.08 |
7-1-2004 |
$5.88 |
$22,395.83 |
$15,888.88 |
-$6,506.95 |
6-1-2004 |
$6.17 |
$22,178.22 |
$22,632.08 |
$453.86 |
5-4-2004 |
$6.10 |
$34,361.23 |
$22,672.51 |
-$11,688.73 |
4-1-2004 |
$7.94 |
$70,203.64 |
$62,600.52 |
-$7,603.13 |
2-1-2004 |
$6.73 |
$49,721.91 |
$39,893.09 |
-$9,828.82 |
2-2-2004 |
$6.21 |
$44,302.33 |
$30,826.11 |
-$13,476.21 |
1-5-2004 |
$5.98 |
$30,174.29 |
$27,234.06 |
-$2,940.23 |
12-1-2003 |
$5.36 |
- |
- |
- |
11-3-2003 |
$5.06 |
- |
- |
- |
10-1-2003 |
$5.13 |
- |
- |
- |
9-2-2003 |
$5.11 |
- |
- |
- |
8-1-2003 |
$5.12 |
- |
- |
- |
7-1-2003 |
$4.56 |
- |
- |
- |
6-2-2003 |
$4.50 |
- |
- |
- |
5-1-2003 |
$4.66 |
- |
- |
- |
4-1-2003 |
$4.44 |
- |
- |
- |
3-3-2003 |
$4.61 |
- |
- |
- |
2-3-2003 |
$4.85 |
- |
- |
- |
1-2-2003 |
$4.74 |
- |
- |
- |
12-3-2002 |
$4.44 |
- |
- |
- |
11-1-2002 |
$4.55 |
- |
- |
- |
10-1-2002 |
$4.52 |
- |
- |
- |
9-4-2002 |
$4.47 |
- |
- |
- |
8-1-2002 |
$4.54 |
- |
- |
- |
7-1-2002 |
$4.80 |
- |
- |
- |
6-5-2002 |
$5.05 |
- |
- |
- |
5-1-2002 |
$4.54 |
- |
- |
- |
4-2-2002 |
$4.67 |
- |
- |
- |
3-1-2002 |
$4.50 |
- |
- |
- |
2-4-2002 |
$4.30 |
- |
- |
- |
1-2-2002 |
$4.59 |
- |
- |
- |