Go to Silvar. There should be a weapons store that is closed there. Bash down the door. Go behind the counter and try to walk into the walls. You should find a secret door with two special encounters (white circles). The first tells you that the room is full of dust, the second will inform you of a trap. After the trap, search the nearby crate by standing adjacent and looking into it. You can now take a shiny new short sword from the crate.
The castle
Find the town Silvar. Exit this town and walk south until you reach the second sign. Go west until you reach a sign that tells you where the great cave, a town, and the castle are located. To get to the castle, you have to go to the town indicated by the sign. Go through the town (there is a portcullis charging you $5 to get through, pay and go into town). Once on the other side of the town, you will reach a pit. You need the mage spell "Fly" to clear it. You will find the castle after the pit.