The Magic Cave is hard to see in the overworld—it's in the mountain east of Fiona's Villa. You can't enter until you've repaired the Masamune and recruited Frog. Entering will make the Masamune a usable (and powerful) Weapon. Note the bat that starts following you here. Vamps can be killed with Weapons, but you should use magic on Gremlins. If you haven't taken Frog to Spekkio yet, he will mention magic after the first fight here. There's a note about Jugglers on the dead guard near the exit.