Preferences > Advanced will not tell iTunes where you media are located. It only tells iTunes where you want to start storing new media from that point on.
Removing playlists from a library but leaving media locations would have to be done very deliberately. We are getting to a stage of detail now where you would have to recount every single move you did with iTunes for us to figure out why you are seeing this. Or perhaps you are not and it simply needs to be better described. 🙂
The basic working of iTunes is not very complicated but obviously something has gone wrong for you which means you likely had something non-standard in your set up. Because of this you need to understand a bit about how iTunes works so you can troubleshoot what is going wrong, otherwise you are going to have to explain things in great detail.. iTunes does not work with media files directly. Just about everything you see in a library window open in iTunes is the result of the iTunes Library.itl file. This has the playlists, and it also has the location information for each track you have entered. So when you decide to play track XYZ in iTunes, the application goes to the .itl file and plays the file in the location for that entry. This is why if you move the files to a different place iTunes will show a broken link, particularly if you move them to a different drive. If you move everything as a package (the whole iTunes folder), iTunes will use a local folder structure reference ("the file in this location on the same drive as this library") and keep track of it.
About iTunes library files - https://support.apple.com/HT201610 - Does not mention that a complete working library also includes other files and folders also in the iTunes folder.
More on iTunes library files and what they do - http://en.wikipedia.org/wiki/ITunes#Media_management
What are all those iTunes files? - http://www.macworld.com/article/139974/2009/04/itunes_files.html
Where are my iTunes files located? - http://support.apple.com/kb/ht1391
iTunes 9 [and later]: Understanding iTunes Media Organization - http://support.apple.com/kb/ht3847 - plus supplemental information about organizing to new structure https://discussions.apple.com/thread/6477809?answerId=26404702022#26404702022
You can look into using Time Machine. I do not have it on my computer and can only post a link: 06/2014 ChrisCA post: Restore iTunes library from Time Machine backup - https://discussions.apple.com/thread/6374283?answerId=26104480022#26104480022 Useful tips where restoring to a new drive: http://pondini.org/TM/B6.html and https://discussions.apple.com/thread/6811322?answerId=27599985022#27599985022 Make sure you go back far enough for the version you want. If Time Machine just backed up the "latest" version may be one you do not want.