European Central Bank president Wim Duisenberg announced on Sunday that 15 European central banks had committed themselves to an annual ceiling of 400 tonnes, or 2,000 tonnes over five years, on combined gold sales, including already announced sales plans by Switzerland and Britain. Spot prices rose sharply after the announcement. In Asia gold traded above $285 a troy ounce and the metal opened nearly 6 per cent higher in Europe.

It fixed $11.70 higher in London on Monday morning at $281.70, the highest since May 7, when the UK Treasury announced plans to sell more than half its gold reserves over a number of years. Analysts expected gold prices to reach $300 this year in the wake of the latest European plan. "It think we will see $300 gold this year. It may come slowly, it may come quickly. I think we are in a new environment for gold now," Chase Manhatten precious metals analyst Martin Fraenkel told Reuters Television.

The European announcement, made in Washington on Sunday night, ended much uncertainty about gold supply in the market and sparked a rush by traders to cover short positions.

Lending restraints

The statement was issued jointly by the European Central Bank and the central banks of Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden, Switzerland, and England.

A key part of the statement said the banks had agreed not to expand their gold lending and their use of gold futures and options over the five-year period.

"The lending restraint is probably the more important part of this package since it does dissuade other short sellers from taking advantage of a price rise. It makes borrowing gold more expensive," Mitsui Global Precious Metals analyst Andy Smith said.

Central banks lend out their reserves to get some return on an asset that costs money to store.

Mitsui's Smith said he expected gold to firm further on the back of the European announcement. "I think the market is going to go better and I think there is a chance that gold goes to backwardation in the short term," Smith said.

Backwardation implies that the price of spot metal is more expensive than that of a futures price, indicating tightness in the market.

The agreement on European gold sales was hammered out on the sidelines of a meeting of the IMF and included the 1,300 tonnes of gold the Swiss central bank has already said it would sell, as well as the gold still to be sold by the Bank of England. "Gold will remain an important element in global monetary reserves," the Europe central banks said in a joint statement.

Gold plunged to 20-year lows after Britain's announcement in May that it would sell around 58 percent of its gold reserves.

Prices started recovering last week after the second UK auction of 25 tonnes of gold.