Create an element with namespace dependent on input XML?

Yes, you can use *[local-name() = 'fred'] to match an element with a local name of "fred" regardless of its namespace.

Within that match, I need to create an element whose local name should be location.

Here, your question becomes a bit unclear. The namespace (or lack of namespace) of an element you create in an output document is up to you; it needn't have any tie to the input document. If it should in some way be tied to a namespace found in the input document, you have to say from which part of the input document the namespace should come.

Update per OP comment below:

I want to use the namespace of parent fred element, whatever it may be, or if it is null/empty.

Ah, ok, this example may help then. Given this XML input document

<root xmlns="http://www.example.com">
  <fred/>
</root>

the following XSLT

<?xml version="1.0" encoding="UTF-8" ?>
<xsl:stylesheet version="1.0"
                xmlns:xsl="http://www.w3.org/1999/XSL/Transform">
  <xsl:output method="xml" indent="yes"/>

  <xsl:template match="/*[local-name() = 'root']/*[local-name() = 'fred']">
    <xsl:element name="location"
                 namespace="{namespace-uri()}"/>
  </xsl:template>

</xsl:stylesheet>

will produce this output XML

<?xml version="1.0" encoding="UTF-8"?>
  <location xmlns="http://www.example.com"/>

which uses the namespace of the fred element from the input XML.

And when given this XML input document

<root>
  <fred/>
</root>

will produce this output XML

<?xml version="1.0" encoding="UTF-8"?>
  <location/>

where location is in no namespace.