Nanocomposite films consisting of gold nanoparticles embedded in zinc oxide (ZnO-Au) have been synthesized with different gold loadings by reactive magnetron sputtering at near-room temperature followed by ex situ annealing in air up to 300 °C. Using X-ray diffraction and high resolution transmission microscopy it is shown that during deposition gold substitutes zinc in ZnO as isolated atoms and in nanoparticles still exhibiting the structure of ZnO. Both situations degrade the crystalline quality of the ZnO matrix, but thermal annealing cures it from isolated gold atoms and triggers the formation of gold nanoparticles of size higher than 3 nm, sufficient to observe a strong activation of localized surface plasmon resonance (LSPR). The amplitude of LSPR absorption observed after annealing increases with the gold loading and annealing temperature. Moreover, UV and visible photoluminescence from the ZnO matrix is strongly enhanced upon activation of LSPR showing strong coupling with the gold nanoparticles. Finally, modeling of spectroscopic ellipsometry measurements unambiguously reveals how curing the defects increases the optical bandgap of the ZnO matrix and modifies the optical dielectric functions of the nanocomposite and ZnO matrix.