Q: original file cannot be found

It sounds fine unless you happen to have something in one of those libraries that you do not have in your now centralized library.  There are utilities (probably payware) that facilitate this, but I can't find a link to one offhand.  If you were to just drag those folders to your present iTunes you might end up with many, many duplicates.

Understood, but does'nt updating " Keep ITunes media organized and copy files to ITM folder when adding to Library." move all files to one location?

It does, but only if you have all the files anywhere on your drives actually in iTunes.  Let's say you have a second iTunes library somewhere and you added a song xyz only to that.  Your library that you are using now may not know about it and not have a copy in it.  If you delete library 2 and all its folders then xyz will be gone.  I'm not saying this is what is happening with you, but if you're trying to play it safe.

last but not least when I back up the new ITunes folder below in bold to a back up drive ALL my tracks, text albums etc will copy as well so if I went into I Tunes prefs later on and changed the path to point to the back up file I should dtill see everything in there ( except of course what you brought up before,( if I missed some files)

No.  You copy

Macintosh HD > Users > *User Name* > Music > iTunes

and everything in it (including that media folder) in one go.  Just copy the one folder and all its contents.  Do not do it in bits and pieces or you may end up forgetting something.  Your collection, if you want to have a valid backup must include all the other files and folders in that main iTunes folder. If you copy just the media folder you will lose the iTunes library file which is what gives you your playlists, playcount, ratings, etc. You will also lose artwork.  In addition, do NOT change preferences.  That is not the way you do it for the setup we have going now.  Let's say you copy that whole iTunes folder and all its contents to a new drive and you want to use the library on the new drive.  You hold down the option key while starting iTunes and guide it to the library file on the new drive.  Again, you do not do it by changing preferences.  Now let's say your internal drive fries, you get a new one, and want to recover from your backup.  Just copy that whole iTunes folder from the external back to the internal to the location indicated above.  Again hold down the option key (not strictly necessary in this scenario but I'm keepig it easy) and guide iTunes to your new collection location.