The missing Hatty Gem sword is a known issue that we're currently looking into.
The good news: you can get it to show up again if you follow these directions!
The bad news: you have to start your Hatty game over for this solution to work. :-/ Don't worry, though -- the rest of your Knights will be fine. Hatty's the only gent who needs to go through the reset ringer!
If you'd still like to try my solution, here are directions:
- Reset your CHARACTER data from the Player Statistics screen
** CAUTION: Be very, very, very careful to reset your "CHARACTER Data" WITH Hatty selected -- do NOT reset your "Save Data", as this will completely wipe ALL your progress data from the game (which would be bad). **
- Start a new game with Hatty. He'll be holding the Gem Sword.
- Find another weapon. The easiest/fastest one to get is the Pitchfork in the first level of the game. It's right at the entrance to the Castle!
- Steel yourself for some rapid-fire button pressing, and pick up the weapon you found to make your Gem Sword drop.
- IMMEDIATELY pick the Gem Sword back up again!
If you did it right, the Blacksmith will tell you to come visit him, and the Gem Sword will show up in your Weapons Frog.