The location of an image specifies the object to which the image is attached. Unless the image drawing layer is specified, the default will make it appear above this object, as though it were an overlay.
Note that the image is not inside the specified location. In other words, this loc variable does not behave like /atom/movable/var/loc which specifies the container object. It is more like the image is on top of the specified object. If the object moves, the image will automatically move around with it.