I had better traffic before switching to watermarking. I just had fear that google would drop those images that prevent google hotlinking.
Google never talks straight, and never gives directions, only hints.
One thing I noticed is that it's allowed to redirect to a watermarked image as long as the image size is the same. If you redirect to a smaller size image but with same scale it won't show up. That's a small signal telling you that it's ok to watermark... otherwise why would they allow same size redirection?