E D I T = was busy typing this when Ian had already answered !
Sorry to hear of your trouble
Not head gasket
More to it than that I am afraid.
A blown head gasket on these engines does not get oil and water mixed, nor causes blue smoke. The head gasket is just a metal ring that seals the head to the top of the liner. If you have a Haynes, or look at the VAGCAT on line, you can see it.
http://www.vagcat.com/epc/cat/vw/T2/1987/65/49/673781/" onclick="window.open(this.href);return false;
Here is a quick pic =
Number 4 is the head gasket
Number 1 and 3 are the "O" rings on the liner that keep the oil and water apart.
Number 5 is the head to jacket water seal that often breaks down and causes water to leak out.
I suspect a failure of a piston or rings and as a consequence lots of crankcase pressure the may have blown the liner "O" rings (this is where the oil and water get mixed when that happens)
Or it may be a cracked head
First thing to do is get a compression test done.
Maybe the next thing to do is to contact Elite for a re-con engine 
There have been lots of threads on here re stripping and rebuilding WBX engines.
It's a big job that can go wrong too.
If it turns out you need to research this, shout out and I will put up links to them for ya.
Most of all, wishing you good luck, and if you finish up needing a new motor, I hope it doesn't stretch you too much, esp as Christmas is nearly here
Mind you, there have been a couple of WBX engines for sale on here recently.
If ness, Billy739 often comes across them ( he sold me a good one a year ago
)
