Having the temperature gauge jump up and down can be caused by thermostat being stuck open or closed, normally when this happens the car will overheat.
Having your gauge jump between totally cold and half way is the temp sensor.
even if the thermostat was stuck all the way open there is no way the temp gauge would go completely back to cold. So this is why I would bet my money that it is the temp sensor. Usually it will throw a CEL (but not always) and should be triggered in Vag-com as a temp sensor not reading right.
These are known to go bad. They are cheap - 20 bucks and easy to replace. There is a writeup on audiworld, and may be one here on audizine too, just havnt looked. My gauge worked fine but was constantly getting a CEL, I finally vag'd it when I got a cable and found this to be the problem, replaced it on the street now is golden.
FYI if your car overheat's pull over and shut off immediately and do not drive!!! You can ruin your engine if you try and continue to drive it.
You probably know that, but just thought safe then sorry
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