Let me start by saying I hate rumours and wild goose chases, and I hate people who say they saw something somewhere but only give vague details.
It looks like there is a giant gnome figure carved in the side of a cliff in Henry Steel Mills. Here are directions to find it, so you can go there in the game to see it for yourself and make up your own mind.
- Start at the Heli Assault marker in Henry Steel Mills.
- Face south and walk forward, follow the alley to the rear of the building.
- Directly in front of you is a shack behind a small wooden fence, with a sign "Payne's Place - keep off the mud", named after developer David Payne. There are two Toads inside the fence, and dogs barking can be heard coming from inside the shack.
- From Payne's Place, turn around and head directly west, towards the stone fence, then turn left towards the cliff face.
- In front of you will be a Garden Gnome looking figure, carved into the cliff face, with some lighter coloured boulders at his feet. I say "Garden Gnome looking" because the figure appears to have a cap and beard.
When viewed from this angle, the figure is very distinct, but if you walk further west, the illusion stops working.
I believe this is intentional, rather than an actual illusion, due to the fact that the colours of the rocks which make up the figure are out of place.
I've tried googling it, but I can't find any other reference to other people noticing this figure.
edit: if you get up close to it, you can see how the rock is unnaturally sticking out of the wall, because it was deliberately placed there and is not a random occurrence.