The men and elves make a camp outside the Lonely Mountain, keeping Bilbo and the dwarves under siege. The dwarves spend much of their time in the dragon’s lair, examining and organizing the treasure. Thorin tells everyone about the Arkenstone and says that it belongs to him because it belonged to his father:

That stone of all the treasure I name unto myself, and I will be avenged on anyone who finds it and withholds it.

This worries Bilbo, but he keeps the stone a secret anyway. In the back of his mind, he is beginning to form a plan.

After a period of stalemate, Roäc arrives with news that Thorin’s cousin Dain is marching toward their location with a force of five hundred dwarves. Roäc points out that this army will not arrive unnoticed and that Dain may have to fight men and elves long before he reaches the Lonely Mountain. This is a battle that the dwarves are not likely to win. Roäc also claims that the dwarves have little to gain even if they do win. It is winter, and Thorin has almost no food stored. He and his friends cannot survive without the help of their neighbors. Thorin stands his ground, saying stubbornly that the winter will be as hard for the men and elves as it will be for the dwarves.

When Bilbo hears this, he makes up his mind. When the night is dark, he volunteers to keep watch for Bombur, who is eager for sleep. Then he sneaks out to the camp of the men and the elves, where he demands to speak with Bard. The men and elves are shocked at the sight of the little hobbit in elvish mail, but Bard and the Elvenking agree to meet with him. Bilbo explains that he wants peace and that Thorin is unlikely to give in. He also informs them that Dain and his force is coming and that battle seems inevitable.

Bilbo gives Bard the Arkenstone and asks him to use it in his bargaining. He feels some regret as he gives up the beautiful stone, but he tells himself that it is worth the loss if he can only get home. Bard and the Elvenking marvel over the stone and over Bilbo. They are amazed that he would take such a risk for peace, and they ask him to stay in honor in their camp rather than return to the dwarves. Bilbo refuses; he says he belongs with his friends, even if they are going to be angry at him.

On his way out, Bilbo meets Gandalf, who tells him he has done far better than anyone could have expected. Bilbo tries to ask the old wizard many questions, but Gandalf hurries him back to the dwarves, saying that he will have time for explanations later. Before they say good-bye, Gandalf hints at a new mystery: “There is news brewing that even the ravens have not heard.” Bilbo does not know what to make of this, but he returns to the Lonely Mountain more cheerful than he left it. Untroubled by worries about the following day, he goes to sleep and dreams of a hearty breakfast.