John,
The gun is rust blued which is, as the name suggests, a rust process to begin with. So under bright light it's normal to see some rust under the blue. It's a good sign, it's original and supposed to be this way. The pistol is in a really nice condition and although they can take a beating the loss of value when you accidentally break a small part during shooting can make your eyes water.
The solution, of course, is to pamper this one and look out for a shooter grade artillery
The oddly shaped tool is a screwdriver/loading tool. The tool can be slipped over the magazine button, creating a thumb rest that makes loading the mag a lot easier. The 'knight' is most likely a large Crown/S acceptance mark. It's supposed to be there, so that's good.
About the leather: Talk to our leather guru 'lugerholsterrepair'. The best advice is not to use any commercial leather care or cleaning products at all. Connolly's 'Hide food' is one of the exceptions.