The price of gold is now over $720/oz (USD) which is over a $30 spike since earlier in the summer. The general investing rule is that gold is a hedge against a weak dollar and runs counter-cyclical to stock markets. When gold prices rise, stock market indexes fall. What is interesting is that the price of gold is going up against most currencies and not just the U.S. dollar. What does this mean? The market is beginning to hear the drumbeats of an economy slow-down not just in the U.S. but globally (in spite of yesterday’s stock market gain). As I posted earlier this week, it may be pre-mature to say we are entering a recession but it is safe to assume the economy and the market is off-peak. At the very least, we may be entering into more turbulent economic times if not a recession.

Assuming that the streets are not paved with cheap money, ever rising stock markets and escalating real estate prices in the near future, what can we do to protect ourselves from an economic down-turn? If you recall, the last time an economic slow-down occurred was circa 2001-2002 which might as well be 10 years ago in internet time. I know 2008 is not going to be as good as 2007 for me so there are a few things I have done to recession proof myself- even if a recession never happens. There’s no guarantee this will work but it makes me sleep better at night.

1. Defining what really is a want and a need

I have a friend who I quite admire for his frugal approach to money- he has a life (he goes on vacation, he takes his family out on weekends etc. etc.) but it is not full of excess (i.e. he’s not staying in 5 star hotels while on vacation). To paraphrase something he once said to me: a want creates disappointment if you don’t get it, a need creates hungry if you don’t get it. Contrary to what you see on tv, no one has ever died because they didn’t get the new iPhone, goto Europe on vacation or buy the purse Nicole Kidman was seen carrying at the Oscars (on a side-note, I recently discovered that high-end purses have seasons to them! Something is definitely wrong with our world)

I have been on a bit of a home renovation tear this year which I have decided to stop. Having finished my kitchen, I have nixed any plans to do the bathroom (even if it was as small as changing the facets) and I am trying to get another 2-3 months out of my washer/dryer before I have to replace them hoping that I can get a bargain at a boxing day sale. I am also not buying any new work clothes; I’ll rotate more ties with the same white shirt.

2. Time to get “moneyed up”/lower debt

As I have posted before, I am keeping a lot of cash around in my accounts both for buying opportunities (”when there’s blood on the streets, the Romans buy real estate”), to pay for any unexpected debts and for liquidity purposes. I am fortunate not to carry any debt other than my mortgage but its always nice to know that I have so money lying around in case something happens. If you are in debt, starting accelerating your payment schedule so you have some excess cash to play with.

3. Maximize credit facilities

There is a line of thinking that instead of maintaining an emergency fund of 3-6 months’ expenses, you should have a line of credit instead so that the money you otherwise would save for the emergency fund could be used elsewhere. I have never been an advocate of this strategy (if you are in an emergency, I am not sure why you would want to put yourself in debt on top of everything else) but, for those who subscribe to this belief, it may be a good time to ask for a credit increase now on your line of credit. Even if you don’t believe in this theory, a large line of credit will give you access to a greater source of funds. When the economy heads south, banks tend to tighten up their lending practices and the opportunity to increase your line of credit may have disappeared. I would not suggest increasing your credit card limit-the interest rate is simply too high to be worthwhile.

4. Credit Proof Yourself

This applies more to self-employed individuals than employees but in good times, people argue on how to split the pie. In bad times, people argue who’s to blame. Statistically speaking, the number of lawsuits increase in poor economic times (if law firms ever became publicly traded, they would make great defensive stocks!). Credit proofing is a whole topic in and of itself which I will address in a separate post but the three things to think about in credit-proof is: (a) insurance is your friend; (b) own nothing but control everything; and (c) credit proofing measures only works before trouble hits. I’ll post separately and in more detail about this issue.

5. Look for opportunities to invest on the cheap

An economic downturn doesn’t mean you necessarily have to stop investing and bury money in the backyard. Change equals opportunity and one of the points of being “moneyed up” is to begin bargain hunting for investment which would otherwise be more costly in good times. We are already beginning to see it in the Toronto condo market in a small scale; I know of two people who bought units from the developer after the first purchaser failed to close; in one case, the developer threw in the parking spot as an incentive to close. Both of the original purchasers had purchased for investment purposes and could not close; in this situation, developers get a little worried and start selling at lower prices to ensure all the units are sold. If the number of aborted closings increase in new condos, we could see a buyer side condo market in Toronto.

A stock I have also been tracking lately which may soon become a bargain is Bank of America which now trades at 1.63 price to book ratio (in the simplest terms, price to book compares the value of the company over the current market price. A ratio of 1 would mean the stock is trading with NO premium. Price to book ratio is very important to valuing a bank); A price to book ratio of 1.5 is typically seen as a sign the stock is an excellent value or there is sometime wrong with the company and the stock isn’t worth much. Bank of America would seem to fall under the former case- it is the 2nd largest bank in the United States, pays a staggering 5.2% dividend yield with a recent dividend increase and has a healthy earnings per share. The general rule is that financial stocks both lead declines and gains. Thus, if there is another drop in the market, Bank of America may become a real bargain. Dividends Matter has a thorough analysis on Bank of America (it is a great blog as well).