I never knew about the difficulty level until recently either. Apparently the game (all versions of Spyro 3 I believe) will adjust its difficulty depending on how well you're playing. It's most evident when trying to get  to the "Impossible Tower" in Charmed Ridge. It doesn't change the location of any of the gems, I think it's probably just how smart the enemies are. And I guess it also hinders your gliding ability a bit.

If it hinders your gliding ability, I feel like I would have noticed it.

However, I did notice that I had to climb the tower edges to glide to the impossible tower in order to get the skill point, while other times, I remember being able to glide and hover it straight out with out much scarping for an edge.

Difficulty level?   I have never heard of this.  Is this from the PAL region version or something?  I have the North American "Greatest Hits" version and I have never heard or seen anything like this.  The game changes the difficulty based on how you are doing?  WAHT!?!?  And what does it change? how hard the gems are to find, the reaction time of the enemies, or something else?

This is amazing, I can't believe I have never heard of this.

And I just got done playing through this game again.

So, what was it that was happening? Brian explains (and sheds some interesting light on how Spyro 3 works):

"It is actually completely unrelated to the Speedway issue, and it only happens to people who are in the 'easiest' difficulty level (the game automatically tunes the difficulty levels for you as you play, depending on how you are doing). You are never prevented (permanently at least) from getting those gems - you just have to go into the level when your difficulty setting is not at the lowest. Some people (a very small number I think) who are almost always playing at the lowest difficulty setting, will almost always be at the lowest difficulty setting."

From here.