You’ll get the Liquid Metal Sword in the Waterfall Cave as a reward for doing the pirate’s treasure side-quest. This side quest will also give you the Sands of Time.

Preparations

• Have your party at least at level 25. After you get the Zenithian Armor would be a good point in the story. Farm for metal slimes around the Royal Crypt to the south of Endor if you need to grind some more.
• Have the Ultimate Key. You’ll get it as a reward for helping the queen of Femiscyra. 
• Gear up accordingly. I recommend having the three pieces of Zenithian Armor already, as well as the Magma Staff and Cloak of Evasion on your magic user and the Falcon Knife Earrings on Alena.

Finding the Waterfall Cave

From Havre Leon or Zalenagrad, sail to the big island on the center-left of the map to reach Dunplundrin. Here you’ll hear about a pirate treasure and a Karstaway Stone that can absorb all water. 

Exit the town, use your Night Light and enter again at night. You’ll see the tides have risen and there’s a whirlpool on the beach. Rest at the inn and go to that same spot during the daytime to pick the Karstaway Stone.

Now that you got the stone, get on your ship and sail to the western side of the world. On the eastern shore between Manikin’s Dominion and Rosehill is a cave surrounded by mountains and a lake that you’ll need to enter.

Exploring Waterfall Cave

Use the Karstaway Stone at the end of this room to absorb all the water and unlock the rest of the dungeon. Head north and access the next floor.

In here you’ll find a chest with the Sands of Time, an item that allows you to restart any battle. This is extremely useful to farm Metal Slimes as you can use it to restart the fight whenever they flee.

Use the Ultimate Key to access the rest of the dungeon, and get to the next floor. Walk west through the only path available, picking up the Mini Medal along the way, until you reach the next floor.

If you head straight south from here, you’ll find a chest with a Death Mask. This cursed item has the highest DEF number in the game but gives permanent confusion to whoever is wearing it. Use it with caution. 

Walk back and instead of heading south, go east. On the next fork in the road pick the chest with gold on the south then follow the path north. Stick to the eastern edge of the map and keep following this path until you reach the next floor.

From here simply walk straight south to open the chest with the Liquid Metal Sword. If you collected all the chests previously mentioned, there is nothing left in the dungeon, so cast Evac to leave and continue on your journey.

Liquid Metal Sword Stats

This sword has the highest ATK rating you can find during all of Chapter 5, and not only that: it does more damage to metal enemies. This makes the sword almost mandatory for farming Metal Slimes.

Specifically, it does the following:

• +130 Attack
• Does +1 Damage to Metal enemies