Dollar Cost Averaging and Commodity Purchases

One of the most basic approaches to investing is what brokers or money managers refer to as "dollar cost averaging". Simply put, the dollar cost averaging approach to investing in the market suggests that rather than taking a pot of cash to buy securities in a single investment move -- which may in fact be cheaper from a transactional standpoint than multiple investments over a period, but as we all know, the cost of transactions is often negligible compared with price movements that go against us -- individuals and funds should look to invest their available cash over a period of time to "average the market" rather than trying to buy things when they're down. Over on Spend Matters affiliate blog Metal Miner, Lisa Reisman suggests a similar strategy for metals purchases.

Lisa suggests that, "depending on the specific market, one tried and true strategy involves the same principle as dollar cost averaging -- take advantage of declining prices by buying on the spot market (as opposed to a long term contract) at current low prices. But know that categories such as aluminum which are currently trading at or below the marginal cost of production are close to or at their trough prices … A metals purchasing strategy of buying one's requirement as needed and over time taking advantage of dips etc probably makes very good sense." Those companies whose hedges are currently under water would no doubt agree! Personally, I'll go back to Finance 101 and suggest that a portfolio approach that combines spot and long-term contracting for commodities is probably the safest of all. You won't buy at the cheapest price, but you can be assured of diversifying your risk

- Jason Busch

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