The temp gauge should be installed wherever the fluid is HOTTEST if possible. (of course, I have no idea where that is) You want to know when the fluid reaches a temperature which will start to cause a problem. You are concerned with not overheating the transmission. If the fluid exceeds whatever temp causes problems (probably max fluid temp before breakdown), and you aren't measuring it at that point, then you don't have anything more than a relative gauge. (which isn't a bad thing)
If cold and hot fluid are mixing, and thats where the sender is, then the reading will not be indicative of the hottest portion of the transmission, and thus, you have to rely on whatever temp is "normal" to determine when the transmission is "overheating"...you won't actually know if the fluid is breaking down elsewhere due to heat, if you aren't measuring at the hottest point, or you don't know what the temperature at location A(sender) will be, if temperature at B (hottest point) is XXX*
Instructions might say then, "install sender in fluid out line. Fluid temperature should be 200 (made up number) degrees normally." That would indicate to me that the manufacturer of said gauge has done some homework, and knows what temp at point B will be, if you see 200 degrees at A. Or that the manufacturer just guessed /forums/images/icons/smile.gif
Since it is a "closed" system, fluid temp changes will show no matter where the sender is, just not to the same level in all locations. Again, if you do not know exactly what the temperature should be in the senders installed location, all you can look for is a change from "normal".
I looked for fluid routing charts for the 700, but I didn't find any.
So I say, install where the fluid reaches the hottest point. If thats not known, or not possible, install where recommended, easiest place to install, or wherever you want, and use the gauge to determine when temp isn't "normal"