The Hobbit - Chapter 01 - An Unexpected Party

[Hookbill the Goomba]

The Hobbit. Even if you don't think it completely fits in with the rest of Middle Earth, its still a fantastic read.
Something that has struck me about 'The Hobbit' especially the opening is the use of Faërie. After reading 'On Fairy tales' by Tolkien, he speaks of Faërie as being a (perilous) realm that is not of this earth. Within the first few pages there is a sense of Faërie and even a mention of it.

It was often said (in other families) that long ago one of the Took ancestors must have taken a Fairy wife.

Many have remarked that The Lord of the Rings and Middle Earth is Tolkien's attempt at a mythology for England. I would disagree; I would say that it (The Hobbit in any case) is his attempt at a new Fairy tale. Being frustrated with the modern view of fairies as small creatures that hide in flowers, he wanted to bring back the true perilous realm of Faërie. The Hobbit is where he begins this ambition, yet it seems that the tale ran away with him and became entangled in his already established (in his mind) Middle Earth.

There are other mentions of Faërie things, such as Gandalf's gift to the Old Took:

... a pair of magic diamond studs that fastened themselves and never came undone till ordered?

Although, I am often thrown by Gandalf's use of the phrase, "Very amusing for me" when describing sending Bilbo on this Adventure. I always saw it as Tolkien trying to show a malicious side to Gandalf, that he wasn't all good.
Any thoughts?

EDIT: I'm using the 1995 hardback edition. Cover illustration by Tolkien himself.