The Grand Slam-winning Wales hooker had been playing at Kingsholm on a short-term deal after leaving Celtic Warriors and being forced to work as an engineer playing semi-professional.
The 32-year-old joined Gloucester in December until the end of the season and, after signing a long-term contract, will remain with the club until 2007.
Davies told club website gloucesterrugby.com: "Gloucester's decision to bring me here at the end of last year gave me an opportunity, and as an individual you value that kind of commitment in people at the club.
"If I think of how things are now and how they were last summer there can't be a better situation.
"I've got to know everyone a lot more over the last few months, and through the Six Nations it was good to come back here, when we had a couple of games, even though I was injured for one of them.
"It was good to get away from the Six Nations focus and keep it fresh from a playing point of view.
"I love it here at Gloucester. Pontypridd, where I used to play, was one of the biggest supported clubs in Wales, and that's the case here at Kingsholm. It's a similar environment on match-days and when you're walking around the town during the week.
"The last year has been quite unbelievable. From losing my job just before I got married, through to playing lower division rugby, and then the autumn internationals, moving to Gloucester, winning the Grand Slam, and now the new contract.
"It's been great and I'm happy. I'm fulfilling everything in life at the moment, and the new contract has made life more positive than anyone could know. You only have to walk around the club, see the support and see how strong it is.
"Playing in a Gloucester shirt is inspiring. Gloucester realise players are important. It's given me a fresh start. I play games with new guys with new ideas and different values. And it's got to be good for Wales."