Lots of explanations are offered for the soaring prices of oil and commodities. You can choose from: (a) the terrorism premium, (b) speculators, (c) peak oil theory, (d) shrinking net exports from oil-producing nations; (e) rising demand from emerging market economies or (f) any combination of the above.

But another reason may be as important: the futility of holding dollar-based investments.

The most recent indication is the May interest rate reset on I Savings Bonds.

These are the Savings Bonds that anyone can buy because they are sold, commission-free, in amounts as small as $50. Indeed, you aren’t allowed to buy more than $5,000 of them in a year.

I Savings Bonds, like Treasury Inflation Protected Securities (TIPS), guarantee the money you invest will be protected from losses of purchasing power due to inflation. This is done by adjusting your principal upward to compensate for inflation, as measured by the Consumer Price Index. In addition to the inflation adjustment, you also receive a fixed premium, giving you a modest “real” return. The premium amount is reset every six months and you receive the premium offered in your purchase period, plus inflation adjustments, for the life of the bond.

When they were first offered nearly 10 years ago, I Savings Bonds paid a premium of 3.40 percent over inflation. Since then the premium has declined as the bonds have become more popular and an increasing number of savers have understood that the total return on these bonds was often higher than the return on conventional savings bonds. Those who bought the early bonds, for instance, are now enjoying returns over 8 percent (3.40 percent premium plus 4.84 percent inflation).

The Diminishing Rewards of I Savings Bonds

But that was then.

Savers were shocked on May 1st when the Treasury announced that I Savings Bonds issued during the next six months would carry a premium of zero. Yes, you read that right.

Zero.

Even so, the annualized “return” on the bonds for the next six months will be 4.84 percent, the annualized inflation rate.

The Treasury Department basically told savers it would condescend to take their money, use it for whatever it chooses, and return it adjusted for inflation.

The inflation adjustment will be deemed “interest,” however, so when the bonds are redeemed savers would, in effect, be taxed for lending money to their government.

For small savers it’s a raw deal. But it is offered in a market filled with raw deals for savers. Conventional savings instruments, whether offered by the Treasury or banks, are no better. All are offering interest rates well below the rate of inflation. And then, adding insult to injury, your interest income will be taxed.

What’s unique about the I Savings Bond rate is that the hosing is so explicit. By having a premium of zero over inflation the Treasury is sending a simple message to savers: Drop Dead.

If American savers are getting a raw deal, how do you think the Chinese government feels about its holdings of depreciating U.S. Treasury obligations? Or the Japanese government? Or the Russian government? Or any holder of Treasury obligations anywhere in the world?

When dollar investments are a sure way to lose purchasing power, commodities become very attractive. That’s when we fill our closets with paper towels, soap, canned goods and any other consumable that can be stored.

Well, that’s what big money is doing all around the world. With no real yield on cash, it says let’s own barrels of oil, ingots of nickel, platinum, and palladium. Let’s own bars of silver and gold coins. Let’s own some grain bins.

For those seeking to protect their wealth, Bubble Risk may be better than worthless paper risk. Small wonder commodities are booming.

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