If I understand it correctly, there is a resistance value of the sender that varies with the temperature (or pressure for oil). The system is set up to supply a small (5 volts) to the circuit. The voltage at the return of the circuit is measured by the gauge. The gauge is indicating how much current made it through the circuit. The higher the resistance, the less current that made it through the loop, the lower the reading on the gauge. The lower the resistance, the more current that makes it to the gauge, and the higher the reading. Note on the photo, the reading at low temperature is highest resistance and vice versa.

Of course, I am a mechanical engineer, and my rudimentary understanding of most electrical stuff is that once you let the smoke out, the device doesn't work.