I pulled the cover off and the only thing I see wrong is the gouges you can see in the picture what would cause it to do that

 

Pinion bearing let go and the pinion got into the differential case. The rear end needs a complete rebuild.

 

+1, Yes, pinion issue

 

You can see a piece of the Pinion Gear hanging out of the Diff.

As stated REBUILD NEEDED.

Problem... cracks... double, triple check for any cracks in the Differential.

 

I have a 93 that I'm going to swap from after I make sure all the numbers match up trans is actually what is locked up you can spin diff freely with driveshaft disconnected everything in diff is nice and tight I want to say it's old damage but the silver diff fluid says otherwise

 

Taking a second look at the Differential... the marks in the differential housing appear to be a little older, the Cross Pin marks are not shiny, as I would expect, but the piece that looks like it is sticking out of the diff housing doesn't look good.

You said the oil was silver which is probably the ground off cast iron from the marks, not good and a sign that IF it is old damage, did they use the old oil again ?

Just me but IMHO... at minimum, pull the differential apart, clean it up, check for cracks, even little ones, replace all the bears because of wear from the Silver Oil, replace the gaskets... oh ya... just rebuild the whole things and replace any part that show cracking.

The trans locking up could have beed caused by a differential lock up, there could be a lot more damage in the trans than what you can see.

Good Luck with which ever way you choice to go.
Depending on just how important this vehicle is, it would be better to err on the side of caution.

Ltr

p.s. I'm wondering if the owner before you, took the diff apart, cleaned it up, reused what he could, then found the trans to be damaged/locked up and decided to sell it insted of investing more money.