At a press conference with Chilean President Michelle Bachelet, Gauck said German diplomats "hadn't taken the human rights abuses seriously" during periods he called "dark chapters" in the two countries' past.
The late Paul Schäfer established Colonia Dignidad, about 400 kilometers (250 miles) southeast of Santiago, in 1961 and allowed General Augusto Pinochet's forces to run a clandestine prison on its grounds during Chile's 1973-1990 dictatorship.
Schäfer, a former medic in the Luftwaffe, fled Germany after being accused of molesting boys at the orphanage he ran. He died in 2010 while serving a prison term for abusing children at the colony.
Germany recently ordered documents about Colonia Dignidad from 1986 until 1996 to be unclassified for research purposes.
Dissidents were tortured and executed, according to witnesses' testimony in court documents. Colony members who upset Schäfer were subjected to electric shocks, tranquilizers and long periods of isolation.
Colony members said married couples were forced to live apart and children were separated from parents. Residents were prevented from leaving. Schäfer fled Chile in 1997 after accusations of child abuse and was arrested in neighboring Argentina in 2005 before being extradited back to Chile the same year.
Gauck said he had wished that Germany's foreign affairs service had found clear words earlier on the criminal events in the settlement. German diplomats must learn from these failings and always remain "on the side of victims."
"We hope that the declassifying of these documents will help contribute to knowing the truth about the many disappeared and executed at Colonia Dignidad and its surroundings," Bachelet said.
Gauck said German diplomats had looked the other way as people were "disenfranchised, brutally oppressed and tortured." But he warned against conflating the abuses by the cult with the abuses by the Pinochet regime at its settlement.