Look closely and you'll notice that it has embedded single quotes, which you will have to remove yourself. I would change the awk to a sed:

rm $(gsettings get org.gnome.desktop.background picture-uri |

     sed -e "s/'//g" -e 's,file://,,g')

(Although actually I would look at exactly what the unmodified output of gsettings looks like first, so as to make something a bit more bulletproof.)