There should be some oil splashing around behind that seal. The oil holes squirt some oil to lubricate the timing gears. Some one else mentioned the alignment of the timing cover.
It's been close to 30 years since I've worked on the old 235, 261 but seems like you do have to make sure the timing cover is aligned properly so that the balancer seal is centered.
Depending in the year model 235 there may be a spacer between the timing gear and the balance, but not sure on that. If there is supposed to be one and it is missing, the balancer may be too far back rubbing on the cover.
Sounds like it may be time to remove the cover and see what the noise is.
