No, the iPod always plays from RAM, but playing lossless files means it's accessing the hard drive more often because less music fits in the buffer. And yes, it can access the hard drive and buffer upcoming songs while it is playing. Still, this shouldn't cause excessive pauses between tracks. At least not any longer than you normally get. The problem here is that the iPod does not play gaplessly, even if your files are gaplass.
And to clarify, Apple Lossless is gapless because it's a lossless compression of the exact audio data. Non-LAME MP3s and I'm pretty sure all AACs are not gapless because their audio data is divided into equally sized chunks, and most of the time the end of the final chunk does not align perfectly with the end of the actual audio data, creating a very tiny (usually unnoticeable) gap. I tell you this because while there's no way (besides rockbox, I suppose) to make your iPod gapless, if you want to be a real stickler about your source files, it'd be a good idea stick to LAME MP3 encoding (unless AACs are gapless... can anyone confirm this?).