That describes my old 1GM.
New information. When the engine is running hi RPMs under load or when it is first started there pools of black powder, floating on the surface of the water after it comes out of the exhaust. I initially thought it was oil but it seems to be powdery and completely oil free. It is difficult to pick up on your hand or even a paper towel but when I do it does not appear to be oily. Can anyone weigh in on this and where do I start.
I had the same symptoms for years with my 1GM. Mine was over-propped so it (black soot -not oil - in water) would also occur if I throttle'd up more than normal before allowing speed to gradually build. My max rpm was about 2,400 but speed was just over 6 knots at 2,200 with no adverse symptoms (for several years) so I left good enough alone.
What bothered me the most was the black, powdery soot that appeared on the surface of the water at start-up. I took my mixing elbow off numerous times and never found anything that could be considered an obstruction. My fingers would smudge when cleaning it, but scrubbing it never removed any residue, and I never found any build-up of residue anyway. Somebody once suggested that the black residue that escapes during start-up was simply residue left in the water lift after shut-down. Don't know if that makes any sense at all.
To end my story, I gradually lost power over about a season of light use and started seeing grey smoke while operating normally. I pretty much concluded that seals were probably bad ... I had significant blow-by through the dip stick tube and figured my prop size was a cause for gradual decline. My solution was to get a new engine because that is what I wanted. I have the 1GM in the basement, hoping to dive into a rebuild in the near future and see if I can diagnose the problems with a closer look. I'm hoping to recover the engine and donate her to a worthy cause.