Drug dealer still immediately cashes out his bitcoins so that they can restock their inventory, and the drug buyer still immediately buys bitcoins so that they can buy drugs.

This assumes that the drug dealer has an easy and fast way to wash the bitcoins into clean money. If a drug dealer withdraws $100,000 from mtgox that will raise some flags. He has to explain to the IRS the source of the money.

Given his situation he has an incentive to buy the drugs from his supplier with bitcoins. Those Bitcoins might go to a warlord in Afghanistan who uses them to buy weapons.

There's still a kernel of truth to the analysis, though. BTC speculators - those actually holding the long positions in BTC - aren't going to be willing to stick around for the legal risks of money laundering (at least, that's what it could be in the eyes of the US Government).

Have you read the FINCEN Bitcoin guidance?