I was at the Mustang Rally in '11 and '12.
Both times I stayed in Sturgis.
I like being in Sturgis if I want to go to some of the events and not others, run back to the room mid-day, etc. And Saturday morning, its a short in-town drive to the car show.
But Deadwood does have advantages too as Cloud9 mentioned.
First year I stayed at the Holiday Inn Express. They (and other national chains) up their rates for the holiday weekend, so be ready for sticker shock.
The second year, on recommendation from a Boss 302 friend, stayed at the Starlite Motel. Its an old, mom and pop type, but very reasonably priced. It was a clean room, and about 6 blocks from main street. No frills, just a clean room. They have 2 buildings, and the other one (which has the office) is further south, and close to the Ford dealer. No web site, phone is (605) 347-2506.
Ask the hotel's cancellation policy too. It may be a month or 2 before Labor Day.
Have fun.