How to Make Massive Profits if the United States Defaults

There's a lot of worry among investors today, especially concerning the pressing "will they, or won't they, raise the debt ceiling" question, and the possibility of a U.S. default. And of course, that question brings with it a host of other questions, "If they don't, how will it affect the market? Will there be mass panic? Could this plunge us into another recession? Should I stock up on Twinkies?" the list could go on for a while. So what should investors do?

Assume the position
Assume for a moment the debt ceiling isn't raised. Well ... come Aug. 2, it's probably not going to be a pretty day on Wall Street, or any other street for that matter. But there are a few commodities that I could see skyrocketing with this news: specifically, gold and oil.

My precious
Gold investors have been touting the virtue of gold investing for some time, and I'll admit it, I've been less then moved. However, if the U.S. does default, gold is likely going to skyrocket. I don't know if it will maintain those levels in the long run, but in the short run, gold will likely see widespread inflation.

Not ready to buy that gold bar? Gold mines like Rubicon Minerals (AMEX: RBY  ) , Goldcorp (NYSE: GG  ) , Thompson Greek Metals (NYSE: TC  ) , and New Gold (AMEX: NGD  ) , offer investors the chance to get in on gold profits, without the need of a high-tech safe hidden behind that old painting in your basement.

Bubblin' crude
OK, let's say you're not ready to jump on the golden bandwagon. What other options are there? Oil. Often referred to as liquid gold, oil has seen some massive hikes following states of emergency. Hurricane Katrina, unrest in the Middle East, your grandmother sneezes -- it seems like very little can set oil on a skyrocketing journey. Sometimes it's for valid reasons, but other times, sheer speculation can cause oil prices to rocket out of sight.

Recently, oil prices have dropped as the dollar gains value, but if the U.S. defaults, you can kiss that progress goodbye. Companies likely to benefit from this? Royal Dutch Shell (NYSE: RDS-A  ) , ExxonMobil (NYSE: XOM  ) , and BP (NYSE: BP  ) .

Although there are valid concerns that a U.S. default will cause oil demand to plummet, thus lowering oil prices in the long run, in the short run, oil will likely spike. How long oil maintains that spike depends on people's need to drive their cars and heat their homes. As soon as people don't need those things, I'm sure oil shares will plummet.

The better-than-a-fallout-shelter plan
Besides stocking up on junk food, the next best thing investors can do is invest in gold and oil. Or better yet, not panic. Yes, there is real fear that the ceiling won't be raised, and that will bring with it a host of other problems, but short of relocating to the nearest cave with your trusty dog Tinkerbelle, the best thing to do is to not let fear overwhelm rationale. Is a default possible? Yes. Is it likely? Not very.

Although the suits on Capitol Hill seem to be missing a few brain cells -- didn't we go through this a few months ago with the whole budget thing? -- the likelihood that they'll let the U.S. default is, in my opinion, pretty low. And if they do ... well, I'm sure my fellow Americans and I will let them know exactly what we think come election time.

In case you were wondering, yes, this article is tongue-in-cheek.

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Fool contributor Katie Spence once ate so many Twinkies she threw up, so she's really hoping they don't have to become a diet staple. She does not own shares of any company mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On July 15, 2011, at 7:31 PM, jkeesing wrote:

    I have been in several gold and silver stocks for 20 months now and intend to sell a vast portion o those shares into that humongous gold rally if that should happen. A big question I have is, how will silver move in a US or a Euro default situation? How does it move if there is a resolution agreed upon by the US government (does gold stay in the 1550-1575 area)?

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