Gold News

Dollar-Cost Averaging Gold & Silver

How to build a position in gold & silver by turning dollars into metal each month...

I MAINTAIN THAT it's a tough call what's going to happen to gold and silver this month, writes David Morgan of the Silver-Investor.

The month of September is usually pretty positive for the metals. In fact, there have been several articles talking about the last chance to Buy Gold under $1,000. Frank Holmes, a much respected fund manager, spoke recently about September being one of the best months to be in the metals markets.

I certainly don't disagree with Frank. I'm pretty bullish for September but I am very cautious going into October. And personally, I am more comfortable buying the metal than the stocks here, even with the stocks outperforming currently.

Buying the metal is different from buying precious metals equities or futures or options, because by buying the metal you can hardly go wrong in my opinion. Certainly there was a push into the metals in 2008 where we peaked out – silver above $21.00 and gold over $1,000. Gold has now surpassed that level again, and on Tuesday I sent an update out to Morgan Report subscribers stating that the odds are clearly in favor of the metals continuing higher for a while.

However, the speculative "hot money" – as shown by the commitment of traders reports in both gold and silver – is flashing caution alerts in my view, and by any technical measure, both the metals are overbought right now.

Experience shows that a market can stay overbought for a very long time and continue higher and higher. I now have a pretty good projection on where I think we will top on this rally, and the question then becomes how big a correction will we see? What if the general stock market drops off during October – how will that affect the mining shares? If the Dow gets hit in October, will that send gold and silver even higher?

Longer term, I think we're going to see far higher prices in both metals. Having said that, I think the best approach for the physical metal is just Dollar-cost average. Just discipline yourself to buy so many dollars' worth of gold or silver (or both) each and every month. This approach provides you a very good price basis as these metals continue their upward path. This same technique can be used if you own a gold mutual fund, but I do not advise it for individual stocks.

In theory, the best way to do it is to pick a day of every month and put in the same dollar amount. So, for example, on the first Monday of every month, obtain $100.00 worth, regardless of price, and do that consistently, month after month after month. It accomplishes two things: first, it teaches discipline; and second, you don't have to think about it – you just buy that Dollar amount. Thus, when the price is high you're buying less metal, and when the price is low you're buying more metal. And over time as long as we're in a bull market (and we are), you will actually do far better by using that discipline.

Whereas if you try to time the market exactly and get in and out, it can be done certainly, but it's much more difficult than most people think.

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Founder of the Silver Investor, David Morgan began investing in stocks before turning 18 years old, and was early to this decade's bull market in silver, noting to his subscribers in 2000 that silver was selling for the lowest inflation-adjusted price ever. Holding degrees in both Engineering and Finance & Economics, David Morgan is a respected analyst and commentator on silver investment at sites including Gold-Eagle, SilverSeek, MarketWatch and Resource Investor.

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