That's white grease that you see in the gap on the second pic. The top of the head tube looks fine but I will have it checked Monday if I still can't fix the problem by then.

Good tips there rcb78. My spacers are alloy and when I rotate the handlebar the gap remains in the front, it's not rotating to the side with the bar. So I guess that rules out the stem?

I took it apart again yesterday and the expansion plug had become loose and was slipping up when tightening the top cap. That particular plug can be tighten with a larger hex key, so I torque it down real good, I believe the specs call for 9nm but I don't own a torque wrench. Hopefully that was the source of the creak.