junior,
You are correct in all of your comments.
Method #2 can be either a 5A/15A OR a 5A/20A (even 5A/30A) setup. The reason why it's not critical is that it's only important that the larger (15A or 20A) fuse be much larger in value that the 5A fuse. In case of an overvoltage (or reverse voltage situation), the weaker 5A fuse will blow, thus interrupting voltage to the gauges. Technically speaking, the larger fuse could even be a dead short (only with the Method #2 configuration), since in an overload situation, the 5A fuse will always blow.
Now, the latest news is that I have been making a lot of voltage and current measurements on the gauges in my car and I feel that there are some serious problems when the ignition key is turned ON. I have been designing a new DC-DC converter that will be the ultimate gauge protection device. I hope to have a prototype built within the next two months. I will keep everyone posted on this. Thanks, Jay