For anyone else that reads this post and may also be having trouble with this here is what i did in the end.

First since i could not find the knife myself i had someone else look for me. Still could not be located so i decided to do it the hard way.

For the hard way for me it was as follows:

1) Pick an adept scientist(poor fellow) and turn off sound. (Note turning off sound saves your sanity unless you like to hear her say oh over and over.)

2)eliminate obvious places its not due to full light in area. Also figured it wouldn't be in the ocean.

3) took scientist and began in lower right of screen in vegatation and dark area of grave yard and inch by inch pickup and drop the villager in differnt spots.

4)I had to repeat this for almost all the black/dark areas of the village until i hit the knife finnally near the flower covered hut in the upper left area.

With this method I had the knife in about 2 hours.