The Silver Sheath was intended to increase the damage of sword type weapons - Bone Crusher, Gladiator Sword, Crusader Sword, Neutron Blade - by 25%. However, the item is glitched and the damage bonus is always applied to the player regardless of if they have the Sheath or not, even if they have never owned it. Thus, the Sheath need only be kept if the player is trying to obtain all Charms for the sake of having them.
The Sheath can be traded for in Nobilia Marketplace for 10 Spice and a Golden Jackal, or the Sun Stone. In turn, the Sheath can be traded to another merchant along with 75 Jewels for the Armor Polish. If the player wishes, they can trade the Polish back with another 75 Jewels to get the Silver Sheath back. They may do this exchange as many times as they wish, provided they have the Jewels.
Once the player has traded for the Silver Sheath at least once and then sold or traded it away again, a merchant in Ivor Tower Alley will sell it back to them for 300 Gold Coins. The Alley is inaccessible once Mungola is defeated, so the Sheath must be bought beforehand.