The structural, magnetic, and optical properties of subnanometer Au-N and AuN-1Gd1 gas phase clusters (N = 2 to 8) are systematically investigated in the framework of (time-dependent) density functional theory, using the B3LYP hybrid exchange correlation functional. The size dependent evolution of the gap between the highest occupied and lowest unoccupied molecular orbitals, the magnetism, and the absorption spectra are studied. The simultaneous appearance of large magnetic moments, significant band gaps, and plasmon resonances in the visible spectral region leads to novel multi-functional nanomaterials for applications in drug delivery, magnetic resonance imaging, and photo-responsive agents. (C) 2013 Elsevier B.V. All rights reserved.