They do relate to their quality.
[color:"gold"]Gold for level 5 items. These are usually quest items.[/color]
[color:"yellow"]Yellow for level 4 items. These are placed specifically, sometimes quest items.[/color]
[color:"green"]Green for level 3 items. These are placed specifically.[/color]
[color:"blue"]Blue for level 2 items. These are available as random drops and from merchants sometimes.[/color]
[color:"lightgrey"]Grey for level 1 items. These are readily available.[/color]
[color:"white"]White for basic items.[/color]
It's been a while, but I think this is correct. The level refers to the Identification level which also relates to how many bonuses the item has.
