The stock temp gauge is pretty much separate from the actual functions of the engine, aside from the aforementioned ground. The Engine Coolant Temperature Sensor (ECT, mounted on the opposite side of the intake off your heater pipe), however, is a different story ... but it has little or nothing to do with the temperature gauge on your dash.
Mine was freaking out on the '86 GT and showing the temperature as being pegged HOT when it had only been running for maybe two minutes - I could put my hand on the motor anywhere (except the exhaust, obviously) and it was still perfectly cool. Changing the temp sending unit didn't solve it, either. I simply unscrewed the sending unit and left it lying atop the intake, then threaded in an aftermarket gauge which I've mounted in place of where the HVAC controls once were on the dash. Reads perfectly normal, now.