I have my stuff on an external drive too, no problem with Picasa. Just map your drive to a high letter like X or Z and tell Picasa to use that.
I don't recognize the problem that Lauren describes. All the keywords will not get lost, because the keywords are saved with the metadata of of the photos. Even other programs could use those keywords.
And stuff like albums and descriptions are in the Picasadatabase, but if the drive is not there, the picasadatabase still is. So when you later reconnect your drive (use the right drive-letter again) why would everything be lost?