The lower units with pitot holes for speedometers had a soft rubber plug that sealed the cavity. There were two different types: A small one held in the cavity by a spring clip and a large one pressed into the cavity. Since the lower unit is not original to your engine there is a distinct possibility that the P.O. simply left the seal out.. If either is missing there will be no harm dome, the impact water will fill the cavity and exit with the exhaust.
Now: if it is definitely gear oil you are smelling then there are several sources. As mentioned the shift rod seal may be bad. Below the water pump is a lower mounting plate This plate contains the drive shaft seal and an O ring to seal the plate to the lower unit casting. Since the shift rod seal can be a bellows, a break here will lose a lot of oil. However, a failed drive shaft seal will also leak a lot of oil so you need to check both. If the bellows has failed you are S.O.L. They are no longer available. Look up a previous thread on this where someone modified the lower plate the accept the hockey puck type seal. If you already have a hockey puck type seal, then you have the option of trying to press it further into the casting and thus tighten it a bit, or replacing it with a new one (about 8 bucks) Drive shaft seal is ar
If you have a lower unit with a bellows shift rod seal (Good idea, crappy design) Remember that if you remove the shift rod that the rod needs to be unthreaded 4 turns from seated to work correctly with the bellows. If threaded in too far, the bellows will be fully compressed and forward gear will either not engage or will jump out of gear under load.