Oh Cheri, you're too sweet!
You're so very welcome, and I'm book-searching as I write this! OH! I just got very excited! I found this book with Santa's finger next to his nose on the cover and the description of the story and illustrations sound like it may be IT! But, the people who have read this as a child, say in their reviews
that the newer version 'collector's edition' was a little disappointing as the illustrations and text have been changed a bit and are not as beautiful as the original, so I'm going to try to find the original with this title. Original hardcover may have been printed in 1961.http://www.amazon.com/Jolly-Santa-Claus-Patricia-Pingry/dp/0824941829/ref=cm_cr_pr_orig_subj
Read all the reviews on this page and click on links in reviews to see more.http://ebogie.blogspot.com/2008/12/vintage-christmas-books.html
First, Santa lives in a golden CASTLE, second, one of the reviewers mentions, 'uh oh, a boy spies Santa.' I don't know if this means in the castle or in his (the boy's) home, when he comes down the chimney, but it seems to include many of the elements you described.
Please tell me if the cover and the storyline sound like what you remember.
Here is a long list of both new and used books from different booksellers, but they all seem to be the 2000 'collector's edition'. http://www.bookfinder.com/search/?ac=sl&st=sl&ref=bf_s2_a1_t1_1&qi=dhYqeojZR4aks1oX1yUHUHrxnlI_1765188341_1:46:870&bq=author%3Dpatricia%2520a.%2520pingry%26title%3Djolly%2520old%2520santa%2520claus
I'm still looking for the original hardcover, but it may be out of print or hard to find.....
You're lucky to be a grandmother......I'm still waiting. Right now, I have 3 'furry' (feline) grandchildren, but I became a great-aunt last year! : )