* Dollar index near 10-week peak, stocks up
* Net short position in gold smallest since mid-July-CFTC
* GRAPHIC-2018 asset returns: (Updates throughout, adds quotes, prices)By Swati VermaBENGALURU, Oct 29 (Reuters) - Gold eased on Monday, afterhitting a more than three-month peak in the previous session, asthe dollar strengthened and stocks moved into positiveterritory.
Spot gold was down 0.2 percent at $1,230.22 an ounceat 1500 GMT, having touched its highest since July 17 on Fridayat $1,243.32. U.S. gold futures were down 0.2 percent at$1,232.80 an ounce."Investors are abandoning their flight to safety play andgoing back to a risk-on scenario, so they are buying equitiesand selling gold. It's a sector rotation," said Phil Streible,senior commodities strategist at RJO Futures in Chicago.European shares climbed and U.S. stock indexes rose as gainsin auto stocks, a recovery in the tech sector and relief Italydodged a ratings downgrade helped a rebound from last week'ssteep global sell-off. "The return of risk appetite has taken the edge off gold,which has pulled a little away from its recent highs," CraigErlam, senior market analyst at OANDA in London, said in a note.The dollar edged back towards the 10-week high it hit onFriday against a basket of its key rivals , making goldmore expensive for holders of other currencies. Meanwhile, the markets also took stock of German ChancellorAngela Merkel's announcement that her fourth term as chancellorwould be her last. "Gold is now increasingly in need of supporting fundamentalsto carry it higher. This after the tailwind from short coveringbegins to fade given the sharp reduction witnessed during thepast few weeks," said Saxo Bank analyst Ole Hansen.
Hedge funds and money managers cut their net short positionsin gold to the smallest since mid July, data showed. "Recent buying interest has been predominately driven by theinstigation of fresh long positioning and there is still scopefor recent shorts to be squeezed on a move through $1,245, withfurther demand through $1,250," traders at MKS PAMP said in anote.Banks and brokerages have cut their average gold priceforecasts for this year and 2019, but they still expect pricesto stage a modest recovery, a Reuters poll showed on Monday. Among other precious metals, silver eased 0.1 percentto $14.59 per ounce.Palladium , which hit a record $1,150.50 an ounce lastweek, gained 0.5 percent to $1,110.50 an ounce, while platinum climbed about 0.5 percent to $834 an ounce.Palladium's price premium over platinum will widen nextyear, a separate Reuters poll showed.
(Reporting by Swati Verma in Bengaluru; Editing by Jan Harveyand Emelia Sithole-Matarise)