I would take apart the engine in the car and determine if the knocking sound is from timing chain guides like the OP originally suspected. If the guides are bad I would use the new guides that he just installed into the 3500 engine. If the guides are good then that knocking sound could be from something else like a rod knock.

If it is not the guides, I would do a compression check on both engines, paying attention to cylinder no.3 where he saw water coming out. If cylinder no.3 is lower than 10% of all the other cylinders that means rust has formed on the wall of the cylinder or rust have formed on the rings. This can be verify placing squirting some oil into the cylinder or using fogging oil sold at any marine and automotive store to see if the compression goes up. If the 3500 engine shows good compression on all the cylinders I would just do a head gasket job.

The question is do you have the time to do this. I know of many couples who got divorced because the husband was spending too much time in the garage.

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