Van Velde's time of one minute 07.18 seconds shaved more than half a second off the previous best set by Canada's Jeremy Wotherspoon last December.
But he faced an anxious wait for confirmation of the gold with 14 competitors still to skate after him.
None could better his time though, with team-mate Jan Bos coming closest to make it a 1-2 for the Dutch.
The US took bronze thanks to Joey Cheek.
The victory was a real fairytale for van Velde who missed out on a bronze medal in the 1992 Olympics by just 0.01secs in the 1,000m.
He was also a mere 0.02secs shy of a medal in the 500m race the same year.
Bos, who was also runner-up in Nagano four years ago, came home in a time of 1:07.53 with Cheek a further 0.08secs behind.
Van Velde, 30, who broke down in tears of joy after his shock win, had been considered little more than an outsider for a medal, let alone the gold.
"The Olympic title, such a fabulous world record, this is really unbelievable," said van Velde.
"I didn't have the feeling that I was going that fast. It went all by itself. I didn't feel or see anything."
Meanwhile, favourites Jeremy Wotherspoon of Canada and America's Casey FitzRandolph, who were expected to battle it out for first place, both missed out on the podium positions.
FitzRandolph, the winner of the 500m earlier in the Games, trailed home seventh.
Wotherspoon, who faced the intense pressure of skating last, finished a hugely disappointing 13th.
Earlier in the Games his 500m medal hopes were shattered when he crashed out.
Desperate to make amends for that here he skated at world record pace early on but then slipped on a curve, all but giving up on the last bend as he realised his chance had gone.