The Geolocation feature in all iOS devices depend either on GPS or Wi-Fi. Seeing as the iPod Touch has no gps, it depends on the Wi-Fi to provide the information. Once you connect to Wi-Fi, it will first ask you to allow it to track your location. If you consent (which you only need to do the first time), it uses your IP address, searches for nearby wireless internet services, and asks your internet service provicer (ISP) for information. This way, it can pinpoint your location with around 20 meter accuracy.
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Leon C., wrong. Please refrain from providing information when you do not know what you are talking about.
For location the iPod uses the location of nearby wifi routers that are in Apple's database.You do not have to be connected to the router, the router only has to be broadcasting its SSID.