So I have a 160* T-stat in my 84 LG4 (please no negative comments about it being too low of a temp) and my factory gauge reads about a 1/16 of an inch below the middle mark between 100 and 220, which to me should be 160* mark. How accurate are the factory gauges and should I replace my sending unit?

 

They're not all that accurate, but yours sounds about as good as they get. Does it stay at that level while idling for a while, at startup, or after extended driving? Also depends a lot on ambient temperatures.

 

at a cold start up my gauge reads below 100, which is correct, then after driving it reads 1/16 an inch below the middle mark between 220 and 100, and stuck in traffic with the AC on it reads slightly higher.

 

Sounds like your cooling system is doing a fine job and everything seems normal. If you want more accuracy get an IR temp gun from Harbor freight or somewhere and point it at the thermostat outlet neck area after your thermostat opens