Mistpeak Monorail Station
Meet Sir Walter in the Mistpeak Monorail Station at the opposite end of the lake in Mistpeak valley from the Mercenary Camp. Inside, cross the platform and run up the stairs to join Sir Walter.
After the cutscene, Sir Walter will pry open the gate. Enter the first elevator you come to on the other side and take it down into The Hole.
The Hole [Mistpeak Valley]
Run down the path to the wreckage until you encounter the Hobbes. Hobbes come in many different varieties, but these are particularly susceptible to fire. Charge a Fireball attack and fry the little buggers.
Upon arriving at the wreckage you should hear a familiar jeering (if you've completed the "Gnomes are Evil" Side Quest).
Mistpeak Valley [The Hole] (6/7)
At the entrance to The Hole via the Mistpeak Monorail Station elevator, run down towards the burning wreckage of the Monorail. A post on the far side of the wreckage has a Gnome sticking to it.
Cross the bridge and take shots at the barrels around the Hobbes to eliminate them. In the next area you will encounter a bunch of barrels at a crossroads. You won't have to guess at the barrels' contents: Inside are more Hobbes. The armored Hobbes can still be fried but you may want to smash them with your Hero Hammer if they get close.
Silver Key (Mistpeak Valley [The Hole], 4/6)
Just past the monorail wreckage is a bridge and a ramp leading down to a room full of barrels. Run behind the rack of barrels to score this easy Silver Key.
Nearby is a door that can only open with the Technician's Key. Return later with the key (found at the end of this tunnel) for some goodies.
Continue down the path. Across the cavern is a line of Hobbes and some poorly-planned fortifications complete with explosive barrel supports. Shoot as many of these as you can before continuing.
Your powered-up Fireball spell will do a good job eliminating the armed Hobbes that appear in this passage. Always go for the biggest Hobbe first! A nearby treasure chest in the wreckage of the Hobbe fort contains a gem.
Now, a Summoner Hobbe will block your path. Hang a right at the blocked doorway and swim around to flank it. On the way you can grab a Slow Time Potion at the Dive Spot. While you can use your magic to quickly eliminate the Hobbes around the Summoner, use your ranged weapon to take the magic user out. Melee weapons will get you burned and magic isn't as effective.
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