Preferences settings do not affect iTunes links or get iTunes to scan for media already added. The links are generated when the music is first added to iTunes.
It is not clear how you have things set up a regards to the location of your library files and your media files. Assuming you have only media files on the external drive, when iTunes asks you to find the file you want it to play when you click on a track do just that. It will then ask if you want it to find others.
It would be best to make your library portable. Image of folder structure and explanation of different iTunes versions (turingtest2 post) - https://discussions.apple.com/docs/DOC-7392 and making an iTunes library portable.
Now having said all that, there may be something else going on. First, why did you do a "fresh" OS installation? That's a very Windows-ish solution to a computer problem. I haven't installed a fresh OS on my Mac in 8 years. Second, installing a fresh OS should not have affected your iTunes library. If you are having to set up links again I am wondering if your main library file got deleted (and which you can restore from your backup you made before installing an OS). If that is the case you will have to add all your files back to a fresh iTunes library.