I agree that is probably the head gasket leaking.

I had the same problem with my 1988 260e. I put off replacing the head gasket for two years after discovering that I could stop the leak by loosening the cap on the coolant recovery tank. It is not a recommended practice because the reduced coolant pressure will lower the boiling point, but since I only drove the car a short distance to work it didn't matter.

I finally broke down and replace the head gasket myself. parts were a couple hundred dollars including new head bolts. I also replaced the valve stem seals while the head was off.