Gold leapt $12 an ounce as soon as the markets opened, and was $17 higher at $281 at London's afternoon fix. It was the biggest one-day rise for a decade and a half. The announcement took the market completely by surprise.
Gold shares surged across the world. In London, Anglo- American was the highest riser on the FTSE 100, closing up 304p or 9.4 per cent at pounds 35.31. In South Africa, where up to 100,000 were said to be at risk from the falling gold price, the Gold Index rose 145.1 points or 14.03 per cent to 1,179.2, its highest since October 1998.
It marks a notable victory for the Chancellor as the planned UK auction of 415 tonnes from total gold reserves of 715 tonnes will go ahead, but now at a higher market price. Treasury officials did not try to hide their satisfaction that the controversial decision has turned out so spectacularly well.
Sunday's announcement took the markets by surprise. Andy Smith, an analyst at Mitsui Commodities, said: "The logic was pointing to central banks continuing with these sales, and a co-operative solution didn't seem to be on the cards at all."
The price has dived since the Treasury stunned the market with its decision in May to auction part of the UK gold reserves. The new agreement came about because of alarm over gold market conditions in the wake of the UK announcement.
Eddie George, Governor of the Bank of England, played a leading role in putting together the new deal during August as chairman of the "Group of 10" central banks. It was finalised earlier this month at a meeting of European finance ministers in Finland.
The scale of the market reaction to the UK's auctions surprised the Treasury. However, officials said there had been no pressure on the Government to abandon the remaining auctions. The first 50 tonnes have been sold, with the second auction achieving a price of $255.70 per ounce.
If the price remains at or above yesterday's level, the moratorium on gold sales will boost the Treasury's takings from the remaining auctions over the next three years or so. Officials in Washington indicated they were delighted the UK auctions had "got in under the wire". The higher market price will also boost the amount the International Monetary Fund can raise from its off-market scheme to revalue up to 14 million ounces of its gold reserves. It had assumed a market price of $260.
The central banks involved in the deal not to sell or lease their gold reserves for the next five years include the Bundesbank, Banque de France and Swiss National Bank as well as the Bank of England.The statement implied one bank has already planned but not announced the sale of just under 300 tonnes.
The US and the IMF have already ruled out open market sales of gold, so the great bulk of world official reserves willstay in the vaults until at least the end of 2004. But the sales already announced by the UK and Switzerland will go ahead.