Since you have an original type unit it is probably in the original location and has no electrical component to the temp reading. It may be functioning correctly. If you run the engine enough to get it to full temp the water within the block and head will continue to get hotter for a short time since it is no longer being circulated. The 160 degree thermostat may be opening and closing resulting in fluctuating temps.
Its a little too late for this advice now but I always compare a new temp gauge's reading by heating water in a pan with a cooking thermometer so I know about what to expect as far as accuracy. There usually are off but as long as it is a consistent error then I at least know where boiling at zero pressure is.
Chuck
