How to enable block "overlay" with a gear
You just need to turn on the core Contextual Links module, and make sure that all roles that should be able to see those links have the "Use contextual links" permission.

If it's still not showing, check to see if your theme has a custom block.tpl.php file. If so, make sure that the $title_prefix and $title_suffix variables are being printed out (see the original template file).

The contextual links output is contained in one of those vars (I think it's $title_suffix actually) so the links won't be printed unless the correct one of those vars is also printed.