I indeed deleted that file on the mac and not via iTunes as I noticed that if I delete it via iTunes it takes up way more disk space.
I do not understand what the means. If it is deleted, it is deleted.
If you delete it in iTunes, it deletes the file from teh hard drive and it also deletes it from the iTunes database.
If you delete it from the iTunes folder yourself, iTunes folder, it is deleted from the hard drive but iTunes database is still lookng for it and you have the exclamation marks show up (this is your issue).
The iPod classic can hold 64Gb but it is kind of pointless if I can only sync the iPod with if I download 64Gb of music onto my Mac.
If you don't have the music on your computer to sync to the iPod, how do you think is it going to get onto the iPod?
There are plenty of other music players and other mp3 players that can organise my music better and play it better.
Then why are you using it?
I stuck with the iPod and Macbook andiTunes as it is supposed to all work together, but apparently it doesn't.
It does work fine together.
You want to magically sync something that is not on yoru computer to your iPod (that does not have wireless capability to stream from iCloud)
Even though I have music in the cloud turned on it still doesn't seem to be able to sync with music in the cloud unless I have it downloaded onto my Mac.
Correct. You cannot sync from iCloud to your iPod.
You want to download 64GB of music from iCloud thru your computer to the iPod?
and then later, if you want to listen to music on your computer, stream another 64GB again?
You can make suggestions to Apple here -> http://www.apple.com/feedback/