* Dollar index near 10-week peak, stocks up
* Net short position in gold smallest since mid-July-CFTC
* GRAPHIC-2018 asset returns: tmsnrt.rs/2jvdmXl (Updates throughout, adds quotes, prices)
By Swati Verma
BENGALURU, Oct 29 (Reuters) - Gold eased on Monday, after hitting a more than three-month peak in the previous session, as the dollar strengthened and stocks moved into positive territory.
Spot gold was down 0.2 percent at $1,230.22 an ounce at 1500 GMT, having touched its highest since July 17 on Friday at $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 and going back to a risk-on scenario, so they are buying equities and 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 gains in auto stocks, a recovery in the tech sector and relief Italy dodged a ratings downgrade helped a rebound from last week's steep global sell-off.
"The return of risk appetite has taken the edge off gold, which has pulled a little away from its recent highs," Craig Erlam, senior market analyst at OANDA in London, said in a note.
The dollar edged back towards the 10-week high it hit on Friday against a basket of its key rivals, making gold more expensive for holders of other currencies.
Meanwhile, the markets also took stock of German Chancellor Angela Merkel's announcement that her fourth term as chancellor would be her last.
"Gold is now increasingly in need of supporting fundamentals to carry it higher. This after the tailwind from short covering begins to fade given the sharp reduction witnessed during the past few weeks," said Saxo Bank analyst Ole Hansen.
Hedge funds and money managers cut their net short positions in gold to the smallest since mid July, data showed.
"Recent buying interest has been predominately driven by the instigation of fresh long positioning and there is still scope for recent shorts to be squeezed on a move through $1,245, with further demand through $1,250," traders at MKS PAMP said in a note.
Banks and brokerages have cut their average gold price forecasts for this year and 2019, but they still expect prices to stage a modest recovery, a Reuters poll showed on Monday.
Among other precious metals, silver eased 0.1 percent to $14.59 per ounce.
Palladium, which hit a record $1,150.50 an ounce last week, 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 next year, a separate Reuters poll showed. (Reporting by Swati Verma in Bengaluru; Editing by Jan Harvey and Emelia Sithole-Matarise)