I believe this is a bug in Safari 7, hasn't been addressed in Safari 7.1.
Safari 8 does not (as of the current public beta release) display favicons for sites added to the Reading List. Instead if there's an image on that site it'll display that it seems.
However, Safari 8 does show icons in Favorites and Frequently Visited. But not the favicon, instead it shows the Apple Touch icons, and it selects the proper size as expected for Retina displays.