Hi, John!
OK! A few basics, here....
No, your gauge should not be in the red all the time. That said, you don't know the true oil temperature unless you measure the oil in the crankcase once the engine is fully warmed up. For that, you need a dipstick thermometer (and while I own a Fluke Infrared temp probe, I wouldn't use it to accurately test crankcase oil temperature). Typical VW dipstick thermometers cost around $50 bucks, but you can make do with a candy or sauce thermometer from Bed Bath and Beyond. Pull out your dipstick and measure the length from the cap that sits on the case tube to the lower end and buy a candy thermometer the same length (an inch or two longer is ok, shorter is not). Calibrate it in a cup of boiling water for 212°F. If it's not adjustable, just write down what it reads in boiling water and THAT is 212° An analog dial is fine - you certainly don't need a digital one unless you want to use it on your grill (wash it first!)
Once you have a long thermometer you can trust, go for a ride on a highway and get it up to 60+ mph for 20-30 minutes and then stop, and immediately test it with your candy thermometer by removing the dipstick and inserting the candy thermometer in its place. You should be looking for something between 190° - 215°. Anything over 215° is hot. Anything over 220° is really hot and if it's over 230° pull over and stop. I would trust this far more than someone telling me that "it's not hot".
Your sensor, from the photo, is just to the left of the distributor (I can see the distributor clamp bracket in the right background), the same as 99% of the other Speedsters on here and probably 90% of us use just a standard VW oil temp sender, available from NAPA, CIP1, Bug City and a bunch of others, and also available from Vintage Speedsters. Yours looks just like mine (yours is maybe cleaner). A sensor for a 1970 1600 sedan should work.
Oil temp sensors fail in three ways: Either they start reading consistently low or high all the time, or they fully fail (giving no reading at all) or they leak oil. Yours is not leaking so it's one of the other two. A fourth possibility is that that sensor is wrong for the gauge, but you haven't yet told us what you have for gauges so I can't tell. Lots of CMC cars have "Classic" gauges while Vintage Speedsters runs Asian VDO knock-off gauges and Beck and IM are now selling updated real VDO gauges. All of those may or may not use different temp sensors, I just don't know.
OTOH, a new VW sensor is about $10 bucks and you simply remove the old sensor and install the new one - easy peasy. Put oil resistant thread sealer on the threads (just a little). Nothing special is required for the swap. Go for a ride and see what the new one reads.
If you have an idiot light sensor in there, the gauge will read low (really low) until it gets up to around 220° or so and then will go from all the way low to pinned on the high side in an instant.
On all of the other questions, we see a lot of homebuilt cars without proper heat shielding installed around the engines and that was one of the questions. Not having those shields in place lets you look down on the engine bay and see the ground under the engine and that can make your engie run hot.
Your photo does not show a cylinder head temp (CHT) sensor, so don't worry about that.
Can you send along a photo of your dash gauge? That would help a bit.
Good luck fixing this. It's not too big a deal (I hope) and should be an easy fix.
Gordon
The Speedstah Guy from Massachusetts