Hey Webdog, Ray the Hammer with some 411. I've got the same drill, it may be a different model because it is almost 10 years old, and mine had the same smell when I first got it, and the "clunk" noise I attributed to the higher speed in position 3. The smell went away (or maybe I don't notice it any more), and the noise is still there.
I use my drill often and it's still going after 10 years. I have asked other people about the same thing and their response is the same as mine.
That being said, in addition to being a blacksmith, I also work at Home Depot and people have asked me this same question... I tell them about mine and they seem happy with the response, and go on there merry way.
I've always associated that smell with those old electric race cars that I had as a child, and they always worked fine until I lost them or my sister broke them. Maybe it has to do with the brushes being " worn in", but I'd love to hear other responses to this myself
Man I miss those cars.
Ray the Hammer