You can still play on Xbox live without having a hard drive connected to the console, instead you can used a usb flash drive. To play on Xbox live, you will need a gamertag profile that contains a Xbox live gold membership, which the Xbox needs to sign the console into Xbox live, which is located on the hard drive. If there is no hard drive connected the Xbox 360 console, the console can't find you gamertag profile; therefore you can't play on Xbox live, as it can't sign your gamertag profile into Xbox live. If you have a spare removable usb flash drive, you can copy your gamer profile onto it, pop it in a spare usb slot on the Xbox 360 console and play on Xbox live without a problem. The usb flash drives acts as a hard drive to the Xbox 360, which is why you can load your game profile using it and play on Xbox live.
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