It might also be possible that the sword is just an illusion created by Jenova (she's VERY good at illusion/halluzination stuff, as we know) to entice the party - especially Cloud - into following her. If I recall that scene correctly, no one ever touched that sword, so it's possible that there really is no sword there after all.
Anyway I still agree that it's rather poor writing regardless.
By the way, I've got a much bigger (or more obvious) plothole and didn't feel like opening a new thread just for that, so here goes:
At the end of Reactor No. 5, why does Tifa ask if Airbuster is a soldier? She met Zack and Sephiroth before, and at this point in the game everyone still believes Cloud to be a soldier too, so she knows that soldiers are human beings. That question makes zero sense. What were they thinking when they made this up?