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Russia’s Output of Precious Metals Sharply Increased

03 march 2009

Whereas the world’s gold output dropped by 4% in 2008, Russia’s output of precious metals went up 12% to 5.88 million ounces for the first time in several years, RBC daily reports. The results posted by some of the companies producing precious metals look even impressive: the Polymetal Company increased its output by 15%, while its revenue surged 62%. Experts say that investment demand for precious metals started to grow in the end of 2008, which allows maintaining gold prices at a sufficiently high level.

Last year Polymetal produced 285,000 ounces of gold and 17.2 million ounces of silver (up 8% to 2007) outstripping their own forecasts aired in October 2008. The company’s sales came up to 281,000 ounces of gold (+20%) and 17.7 million ounces of silver (+9%). The revenue was record-high for the whole Polymetal’s history reaching $500 million, an increase of 62% in 2008. In 2009 the company intends to build up gold production to 280,000-300,000 ounces, while silver is to go up to 17-18 million ounces.

The company benefited from the crisis-driven demand for precious metals used as hedge instruments which is virtually the reason for stable demand in this field, believes Stanislav Fomenko of Veles Capital, an investment company. This trend was not hindered neither by the ongoing cheapening of raw commodities, nor by the fast strengthening of the dollar.

Jim Steel of HSBC, an expert on metals, ties gold purchases to the continuing decrease of major stock indices, which makes investors look for less risky assets. “Gold was bought as a safe haven asset,” Prime-TASS quoted him as saying. The Bank of Russia also appears such an investor. The gold part of its gold and foreign currency reserves in 2008 went up from 2.52% to 3.4% reaching 16.7 million ounces (an increase of 15.7%) adding 300,000 ounces last December only.

Polymetal’s production success are not unique and as early as the beginning of the year past it was predicted that gold output in Russia would be increased for the first time in several years.

According to the data furnished by the Gold Miners Union of Russia, in January-November 2008 the domestic refineries turned out over 5.43 million ounces of gold, or more 11.1% than in the similar period in 2007. All this taken into account, everyone in the union expected that annual production will increase by 12% to 5.88 million ounces. Nevertheless, the situation in the Russian gold mining industry is far from being clear of clouds. “In 2009, gold production in Russia may stick on the same level or go a bit higher if alluvial miners will not fail,” says an RBC daily source in the industry. “The problem is that lode gold mining remains profitable whereas alluvial gold miners’ work looks more like a social function of keeping them employed.”

The situation on the world market seems so far to be much more obscure. According to the estimates of Gold Field Mineral Services (GFMS), the global gold output in 2008 decreased by 4% down to about 2112 tons. South Africa displayed the most dramatic decrease (-14%), followed by Australia and Indonesia. Besides Russia, China may also boast of some gain in gold production (+3%) among the largest producers of gold. GFMS experts note that in 2008 the jewelry industry significantly decreased its demand for the yellow metal (by 11%, down to 2380 tons), but this was partially offset by increased investments into gold. As predicted by GFMS, gold purchasing in 2009 for investment purposes may almost double reaching up to 400 tons.

For its part, the Severnaya Pravda Daily, analyzing the state of affairs in the Russian jewelry industry, notes that, since precious metals appear the most reliable means of investment, demand for jewelry in Russia is persistent and the jewelry industry should solve its existing problems to move further. The Kostroma Region where, according to the daily, jewelry is made by over 600 enterprises and firms proposed to set up a social council on the jewelry industry. This proposal was discussed by Russia’s jewelry elite during the Golden Ring of Russia jewelry exhibitions held in Kostroma. After that this discussion was continued in Moscow at the Russian Chamber of Commerce and Industry.

This initiative found a positive response in the Ministry of Finance of the Russian Federation. It was proposed that this council should include not only jewelers, but also the representatives of gold mining enterprises, gems miners and cutters. There are a lot of unresolved problems in the jewelry industry and Russia’s business elite is determined to solve them with the assistance of the jewelry industry social council.

These problems were laid on the tapis of the meeting dedicated to the jewelry industry and held in Kostroma. Its participants discussed the possibility of amending and changing the law on precious metals and gems. Life is moving faster than regulations are revised. In 2008 Russian jewelers spent much time discussing the problem of tolling. Due to this problem companies found themselves in different competitive environments. This year, the problem was solved by way of customs regulation.

Production problems in the jewelry industry remained among the urgent matters for jewelers. For instance it is not an easy thing to get credited in the beginning of the year to buy raw materials. The jewelers who met in Kostroma initiated discussion of such a problem as allocating raw materials to law abiding companies. This could stabilize the situation for such enterprises and give new jobs.

Valery Radashevich, General Director of the Guild of Russian Jewelers, offered to discuss the possibility of adopting an anti-crisis program for the jewelry industry. Assigning quotas for imported jewelry is another matter to be discussed. Nowadays economic wellbeing of an enterprise also depends on this aspect. There is a lot of head ache with smuggling jewelry. “We need some public floor to be able to detect weak points, colligate facts and lobby the industry’s interests with government agencies,” Kostroma Governor Igor Slyunyayev says. For instance, there is a current problem of cancelling VAT levied on gold bought from banks. This business is very active and such bullions emerge in jewelry enterprises. The result is that jewelry made of these ingots will rise in price by 18%.

The next meeting, the Severnaya Pravda says, as believed by the Kostroma authorities, will be held already in the Ministry of Finance as a way of interaction between the Russian jewelry business and the state.