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Find the Red Hammer Tribe, which Svadilfari leads. In order to enter the caverns where Svadilfari lives, you will need to get past all the bastilias which guard the whole area. Simply take dragon form and take them out one-by-one.
When you enter the cavern, Svadilfari will ask you to kill Aurelius. You now have a choice of sides, but even if you side with Svadilfari and kill Aurelius, the goblin will attack you anyway when you return to tell him that the deed is done (if you've destroyed enough of the tribe's buildings / defenses outside while in dragon form). If you side with Svadilfari it will not cause any Champions to be hostile to you and Talana will remark how you have a novel way of getting ahead.
Whichever option you choose you will have to fight all of the goblins, so ready your A.O.E. spells and health potions, and try to take them one at a time, they are fairly tough and give 2000-3000 exp each. Timpuk, who earlier had offered to trade with you, will also turn hostile.
Svadilfari's goblins do not have range attacks. You can abuse this by jumping on to the platform where the chest holding the Dragon Armor can be found (it is behind Svadilfari after performing a mindread) and using ranged attacks. Your creature won't attack them either whilst you are on the plank.