They can get pretty HOT I know mine is really hot to touch after a while of driving, but you shouldn't be smelling burnt gear oil. Did you change gears?? There is a break in period for new gears. If not how much gear oil did you put in?? I think I put in like 4 quarts. As dillard said pop cover and inspect. Right after I installed my 8.8 I was paranoid and thought the same as you and it turned out to be nothing. Now I have over 5,000 miles on mine and one trip to Moab.
build thread: http://www.jeepforum.com/forum/f22/skyj-eccentric-build-1467426/ '90 YJ 5.2 magnum MPI, AX15, NP231 SYE, Dana 30 4.56 open/ 8.8 4.56 detriot locker. 1" shackles
2" BL, 4" stretch all on saggy waggy springs.