I dont know what the gap is supposed to be as it would change with diffrent wheel sizes and offsets but it should be fine because that point never moves in relation to the tire, that is, both points move together so it cant get farther or closer.
how long have you been running that setup? If it's been awhile, and you haven't rubbed, then you should be fine. Also, the 1/8" gap between tire and balljoint should remain about the same during the suspension's normal range of motion, I think...The balljoint is "fixed" to the spindle, as is the the wheel/tire assy, so they are moving as one unit. Doesn't look good, and it's probably not ideal, but I'm guessing that you'll be fine.
I have VERY little clearance between my UCAs/upper balljoint and the lip of my 17" rim, but other than some rubbing on full lock, which I have almost eliminated, it has been fine so far.