A Case Study In Precious Metals Confirmation Bias and Charlatan Ignorance

I made the mistake of trying to help a precious metals blogger with a *fact* he got completely backwards, and I figured I may as well just explain the reality of the situation on my own blog instead of continuing to interact with him in his own blog comments.

Gene Arensberg of the GotGoldReport has been bloviating lately about the positioning of the Swaps Dealers category in the silver Commitment of Traders Report.    Although he spent weeks breathlessly writing about how the Swaps Dealers were overly short gold and silver futures on the COMEX and thus “vulnerable to a short squeeze,”  Gene probably knew all along that the Swaps Dealer probably aren’t really taking directional bets on the prices of the metals, but are actually hedging the exposure of their swaps books.   If the COMEX positions are hedges for the Swaps books, the “short squeeze” thesis has the winds taken out of the sails – one cannot get squeezed if one is hedged*.     So Gene probably wanted to stick with his “SHORT SQUEEZE POSSIBLE” line of reasoning until a better story came along that he could serve up to his readers, who of course want confirmation bias telling them that the metals will go higher.

Then Gene wrote a Magnum Opus yesterday – a showstopper post that reviewed his recent posts on the subject, and delivered the Big Reveal in terms of the new heaping portion of confirmation bias: “COMEX SWAPS DEALERS HEDGING A MASSIVE LONG PLAY ON SILVER?”    What’s amazing is that in this post Gene emphasized a disclaimer he’s briefly mentioned before, namely, in his own words: “the Swap Dealers are also not making a one-way bet using futures, but instead use futures to hedge their swaps.”   I couldn’t agree more.   This is a natural observation for any informed commentator.   What’s inexplicable, then, is Gene’s conclusion/follow up question designed to get his readers excited about someone making a big bullish bet on silver:

“If the combined Swap Dealers have used COMEX futures to HEDGE their Swaps Book, then who in the Sam Hill took such a giant long position via swaps? Whoever it is HAS TO BE HUGE and whoever it is – is NOT going to be run out of town by the paper sellers. Not if I am right about who I think it is, and I am not saying yet. … “

He repeats a paragraph later, capital letter emphasis his own:


Now, if you’ve ever traded anything or managed any sort of risk, you should spot the problem immediately:  Gene has it backwards.   Completely, 180 degrees, why-on-earth-would-anyone-try-to-defend-an-error-like-this backwards.     I tried to explain the logic – using his OWN claims – in the comments of his post, but Gene wasn’t up for being corrected (I guess when one’s Magnum Opus is self-contradictory and clearly wrong,  it’s embarrassing – admitting an error is not even an option..???), so I’ll explain it here again:

If a Swaps Dealer is using short futures to hedge, as Gene Arensberg alleges (and I agree!), then the Swaps dealer has a long position on the other side.   How does the Swaps Dealer get a long position?   That’s easy:  he has a client who wants a short position via swap.    Get it?   The client goes short on swap vs the Swaps Dealer who goes long on swap.  That’s the first trade.  The next trade, the hedge (per Gene Arensberg’s own words – which again, I agree with!) – is for the Swaps Dealer to hedge his risk on the COMEX (or elsewhere) by getting short exposure.

Of course, if Gene’s post had been titled “COMEX SWAPS DEALERS HEDGING A MASSIVE SHORT PLAY ON SILVER?”  Then it probably wouldn’t have gotten the readership and distribution he wanted – confirmation bias doesn’t work when you tell The People the opposite of what they want to hear!   Charlatans like the guys at GATA probably wouldn’t have distributed it – even though it would have made sense, especially compared to the completely senseless post that Gene actually wrote and that GATA still distributed.

So to answer Gene’s all-caps question: “WHO IN THE SAM HILL TOOK ALL THAT LONG ACTION VIA SWAPS THAT HAD TO BE HEDGED?”   Ummm –  the answer, if we’re using Gene’s own theories from his own post (but with a real-world understanding of how hedging and swaps risk actually works),  is that the Swaps Dealers “took all that long action” because a client wanted to get short exposure to silver.   Yes – the proper question is: who in the Sam Hill took all that short action via swaps that had to be hedged?!?!?!

I have no desire to debate the meaning of the positioning in the Commitment of Traders report.   Nowhere in this post have I even begun to do that.   What I’ve done, above, is explain simply that if one believes (and I do absolutely agree with Gene on this) that the Swaps Dealers are “using futures to hedge their swaps,”  then one must also understand that short futures positions for the Swaps Dealers arise as a natural hedge to customers who seek short swap exposure (not from customers who want to bet on rising prices).    Anyone who tries to claim the opposite is, as I noted in prior posts, deceiving you out of either ignorance, or malice.   To write that large COMEX shorts by hedging swaps dealers mean that someone made a long bet on silver is a contradiction in and of itself.   In video terms: “it does not compute”:


In Gene Arensberg’s case, I don’t think malice is the issue, it’s simply ignorance.   Shockingly, Gene didn’t seem to want to acknowledge his error, instead commenting below his own post: “the Kid presumes to know who the swap dealers hold the COMEX shorts for. And he will opine in a condescending, arrogant way nice and slow for us.”    On the contrary – I made no assumption or presumption about who the Swaps Dealers hold the COMEX shorts for – I simply explained that short futures hedge client short swaps – not client long swaps, which was the entire error of Gene’s post (starting in the very post title).    I did indeed try to explain it nice and slowly**, because it’s a ridiculously simple fact of risk management, and because Gene, asking questions like “How do you hedge a short swap with a short future?” was indicating that perhaps he knew nothing at all about how swaps actually work.

In closing (self-quote!):

I will simply repeat this fact:  when your theses are based in false foundations, you can only be “correct” out of dumb luck.   One shouldn’t be surprised when the predictions made by charlatans who rely on nonsense themselves turn out to be nonsense.

Related:  My Confirmation Bias Category

Precious Metals Charlatans – Freaks of the Industry

The Wire’s Precious Metals Lesson: Don’t Get RainMade



* there are some caveats about maturity of OTC contracts, etc…


** postscript:  here’s the 2nd reply I left on Gene’s blog to try to explain it to him:

Gene –

i’d like to draw a picture for you, but I’ll try to just use arrows given the limitations of my skills in uploading stuff to comments.

Each swap has two sides. A long, and a short.

In this case, if, as you proposed in the post, the client were long silver on swap vs, say Swap Dealer X, then Swap Dealer X would be short on swap – Swap Dealer X makes money if silver goes down, and the client makes money when the price of silver goes up.

Of course, as you noted, the Swaps Dealers aren’t making big naked bets (A point I’ve been trying to get across for years now), so they’d hedge their short swap exposure. How do you hedge a short? by BUYING silver exposure.

but what we’re seeing now is the opposite: Swap Dealer shorts. There’s a perfectly reasonable explanation for this – you even tried to tell the story in this post, you just got it 100% backwards: the client goes SHORT on swap. Now the client is short and the swaps dealer is long.

Of course, the Swaps Dealer doesn’t want exposure to the underlying price, so they hedge their long exposure – by shorting on the COMEX… which is the side of the trade you see in the COT.


as for the arrows I promised:

Client Short on Swap –> Swap Dealer Long on Swap –> Swap Dealer hedges by shorting silver on COMEX…

now, I understand that “COMEX SWAP DEALERS HEDGING A MASSIVE SHORT PLAY ON SILVER” probably wouldn’t get the same readership as the story you published: “COMEX SWAP DEALERS HEDGING A MASSIVE LONG PLAY ON SILVER,” but there is not a shred of evidence to support the latter, actual story you wrote, and all the evidence to support the former – by your own logic, which you laid out in this post.

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