See ostriches fly! (Update 1)

A friend pointed out that "Mish" over here argues that backwardation in the gold markets is, effectively, no big deal. He quotes a trader as saying:

I have seen countless commodities go into backwardation for numerous reasons, the most frequent being a radical temporary divergence between immediate demand and overall demand. I have seen backwardations that have lasted years.

To which said friend responded:

But has he seen *gold* go into backwardation? Yes, I have seen birds fly -- this is normal -- but have you ever seen an ostrich fly? That's gold in backwardation, or just about. This has happened once in the last 10 years and that was when Ashanti and Cambior found themselves too short by half in what turned out to be an illiquid physical market. Both companies were almost undone. I cite this because it illustrates what backwardation speaks to, namely, tightness in the underlying markets. Now, this is normal in other commodities such as copper because there are no readily available above ground stocks of copper -- there is no copper "float", as it were. But gold? Aren't there vaults and vaults full of the crap? Is there not an active lending market in the stuff? We had thought so. And if so, does it not make sense to borrow gold, sell spot and lock in the front month at a discount? Isn't that free money? Alas, gold in backwardation is strange.

And if the float ever does get mopped up, look out.

Update 1: More on this topic over at FT Alphaville. One commentator had this to say:

As an OTC bullion forwards trader I can safely say there is no backwardation in the gold market at the moment and hasn’t been for a long time. It might be trading around flat and sometimes when I quote the short date forwards my bid is in backwardation but my offer is still in contango, but that is just because USD interest rates are effectively zero in the short end. So who really cares? A real backwardation is when it’s quoted like -1% mid market in USD across the curve while USD interest rates are significantly greater than zero. Obviously this is not the technical definition, just my loose criteria for a significant backwardation.

...

There are far too many gold bugs around who when they buy coins are having their eyes gouged out by the physical dealers and the refiners, and now they are now losing money on their long positions as gold drifts lower. All these gold bugs are trying hard to talk their books up with any silly reason they can find. Reality is there is so much gold around that we just don’t know what to do with it all... it’s useless; the only problem is in the refining bottleneck. If you want to buy 400 oz standard bars there are millions and millions of ounces of inventory just lying around London in vaults gathering dust

Two things: 1. If there are "millions and millions of ounces of inventory just lying around London in vaults" then why don't the owners lend it out? Right now, you'll get about 1% for your trouble, which is about 100 bps more than you'll get on short gov't paper. Or, sell the stuff, lend the proceeds at Libor and lock in a re-purchase three months flat? Not free money? The only reason I can see that this does not get done is because there simply ain't millions and millions of ounces just lying around and available.

Secondly, check out the attitude! Quote: "it's useless." Quote: "All these gold bugs are trying hard to talk their books up with any silly reason they can find." Etc. That's the bullion dealer community for ya. Who do you think is going to get it up the hoop first?