I had to trace the code to be certain I wasn't making a misstatement.
The code logic is as I said: if IG can write to the folder where ImageGlass.exe resides, then igconfig.xml will be written there. This is true whether IG is installed or "portable".
If, on the user's system, you want igconfig.xml to be written to their %AppData% folder, then you have to deploy the IG folder so the user's account does not have Write privileges for the deploy folder. I.e. if you deploy IG to "C:\program files\ImageGlass" on the user's system, then the user account must not have Write access to "C:\program files\ImageGlass".
I know other folks have deployed IG to multiple users, I wonder if we can get them to contribute?