An EXAMPLE concerning trying to use only ONE Hard Drive for Video Editing
You are a music conductor, with a baton that you use to point to various parts of the orchestra... this is like the operating system pointing to various parts of the hard drive to do file housekeeping or to load program segments for various functions
Now, at the same time and with the same hand... while still using the baton to conduct the orchestra... pick up a bow and play a fiddle... this would be doing something with your video file at the same time as all the other work
You as a person cannot do both at the same time with the same hand
A computer is a LITTLE better, in that it can switch from one kind of task to another very quickly... but not quickly enough for EASY video editing
You need AT LEAST two hard drives (separate drives, never a partition for a "spindle" drive http://forums.adobe.com/thread/650708 for more on partitions) with Windows (or Mac OS) and software on your boot drive, and video files on a 2nd drive so the boot drive is not slowed down by trying to do everything... not even with SSD see # 16 http://forums.adobe.com/thread/1352987
Do not try to use a USB2 external drive for video editing, the USB2 file transfer speed is too slow
External eSata or USB3 are both fast enough for video editing... (or Firewire?) http://forums.adobe.com/thread/1117813 - http://ppbm7.com/index.php/tweakers-page/84-disk-setup
ONE possibility is this USB3 dock with fan http://www.amazon.com/StarTech-SuperSpeed-Docking-Station-Cooling/dp/B0055PL2YI
Your question was
Should the native/original video clips be uploaded to the C:\drive, separate internal HD or, external HD? Does it make a difference?
(quality or Timeline playback impact?)
From the point of view of Timeline quality and playback, I would say that it does not make a difference to Timeline quality or playback in the Edit area if the project's source traces back to the original on the Local Drive C, internal hard drive, or external hard drive. What would impact Timeline quality and/or playback
a. Automatic versus Highest set for Playback Quality accessed by right click the Edit area monitor.
b. For HD projects, the preference for Timeline Rendering Quality = Highest quality/Slow speed (1920 x 1080) versus Draft quality/High speed (960 x 540)
See Edit Menu/Preferences/General.
c. Whether or not, the Timeline content was Timeline rendered to get the best possible preview (quality and playback).
d. Whether or not the computer had a compatible video card/graphics card driver version.
The above assumes that the external hard drive choice is not malfunctioning or changing drive letter because of repeated plug and play so that the project is losing its connect to the source media on that external hard drive.
There are many factors that influence the performance of Premiere Elements in a computer environment. But, the above is specific to Timeline content quality and playback in the Edit area after the source media have been imported into the new project.