Is the item unique or generic? If it's generic (say, a longsword) the spell locates the nearest such item, which may not be the one possessed by the invisible creature. Even if it's unique and the caster has a clear mental image of it, the spell only indicates its direction. If the bearer of the item remained stationary while the caster determined the distance to the object (presumably by movement and triangulation), I'd allow the caster to pinpoint the square(s) occupied by the object's bearer but the bearer would still be granted total concealment.