Well, I doubt this would be much help considering it's always changing around and everything, but I found the knife just now around the area where there's, I think they're two waterfalls.
![smile smile](/ubbthreads/images/graemlins/default/smile.gif)
To the left in the bushes next to the hut.
EDIT: I'd just look really carefully around the edges of the island.
![wink wink](/ubbthreads/images/graemlins/default/wink.gif)