“THIS IS SUPPOSED TO BE AN IMPROVEMENT.”
Gears are items dropped by Clockwork Knights, Clockwork Bishops and Clockwork Rooks, and can also be found by digging up Graves (chance of 3.07%).
Gears can be used to build an Ice Box and a Divining Rod, as well as boost the max stats of WX-78 by simply consuming them. In the Ruins, repairing Broken Clockworks with 3 Gears will spawn a friendly damaged chess monster (Damaged Bishop, Damaged Knight, or Damaged Rook).
Clockwork Knights, Clockwork Bishops, and Clockwork Rooks will not respawn, nor will graves after being dug. Therefore, Gears are ultimately a non-renewable resource. (This may be subject to change with the new Reign of Giants DLC, which introduced Tumbleweed)