Hi Jim,
The weight per volume or specific gravity is greater than water for the red fluid. It is about close to four times heavier than gasoline on a volume basis. (
https://en.wikipedia.org/wiki/Tetrabromoethane).
Decreasing the volume of red fluid in the reservoir, that is supported by the fuel height, or the "head" of fuel in the tank; is decreased and has less weight by adding a rod/s. The volume of red fluid at each position such as full is of less weight than without the rods added, so will appear higher in the fuel gauge.
Another way would be to use another lighter fluid that doesn't evaporate easily but KS figured this out long ago and picked the red fluid.
These fuel gauges are manometers. A high specific gravity will have a less height that water. For example mercury with a high specific gravity, would be less sensitive to fuel height head changes but if the gauge was filled with water, the scale would be quite long and no good for the dash plus it would evaporate.