You're right, the Knock Gauge does not show knock retard. That's a function of a computed value, based on engine RPM, load, and what it sees as detonation.
The knock sensor on your engine is basically a microphone that listens to noises; the louder the noise, the more it hears. It is the duty of the ESC module to filter out and separate the background noise from the real piston slap, and it's calibrated to do this fairly accurately. The module then sends data within the "window" of acceptable detonation to the ECM for further processing.
The gauge merely shows the "severity" of knock. It uses the filtered data that the ESC module sends to the ECM, and further filters out the "tickle" knock so as not to bother you with every noise the knock sensor picks up.
So, for the sake of visible knock detection, you look to the color of the LED that lights; green equates to minimal knock, yellow to moderate, and red to severe. It's only a reference to what it sees - not actual timing pull.
Generally it's safe to tune your engine so that you just reach the first yellow LED at the top of the shifts. As a general rule, the first yellow LED equates to 2-4 degrees of KR, a safe point to tune. If you have NO detonation, you're not making the power you should be, and if you have too much detonation, you run the risk of engine damage. A slight amount of detonation is acceptable as your engine is on the "ragged edge" of power output.
The gauge is simply a means to give you an idea of what's happening, in real time, inside your combustion chamber.
Well, that's detonation 101...
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