The fireplace is located at the end of a hall on the right side the manor in the entry area. It can sometimes be found in the fireplace of Leoric's Manor in Act I. It may work out that it takes you 10 hours or 10 minutes to find all the items you need.Leoric's Shinbone is a miscellaneous crafting material in Diablo III, it is used to construct the Staff of Herding which is necessary to access Whimsyshire. Be sure to dedicate a large chunk of time to building your Staff of Herding and don’t be impatient when looking for individual items. Warning: These items are rather rare and difficult to find. Here is what the chest and the Liquid Rainbow look like:

Of course, it only took me 2 tries but many people report that it took as many as 50 runs. It will not always spawn and it will not always drop Liquid Rainbow. Clear the inside of the cave looking for a mysterious chest.

He will unlock the door to the mysterious cave. Remember, he doesn’t spawn all the time so you’re probably going to be doing this process over and over again. If the merchant is not there with a quest for you, leave the game and resume to start the process over. Head east and south along the edge of the map until you find a nook, travel into this nook and look for a merchant who will request assistance from the nearby mobs. Use the way point to go straight to the Path to the Oasis. To find it create or join a game on the Blood and Sand quest of Act II. The vile of Liquid Rainbow is found in Act II on any difficulty. Since none of them can be traded, bought or sold you will need to find one of each for yourself along with the recipe and then craft your own staff. To craft a Staff of Herding you’ll need 5 difficult to find items. It’s loaded full of rainbow colored ponies and what not. The staff is then used to unlock the secret cow level in Diablo 3, which is actually called Whimyshire. Liquid Rainbow is a secret item hidden within the game for the sole purpose of crafting a Staff of Herding. The colors swirl and twist in hypnotic patterns.

Diablo 3 rainbow liquid location