It is easy to explain the First Age of Middle Earth and the creation of the universe as a purely metaphorical mythological history of the Elves, in the same way that myths of the gods and adventures of Hercules, Achilles, etc were a metaphorical mythological history of the Ancient Greeks. The Valar each choose an element of their liking, and their dealings within the Silmarillion could be interpreted as simply the relationship of the elements to the creation of the world and to history. Certain figures such as Earendil becoming the Morning Star or the Numenorians resulting in the world becoming round can easily be seen as myths that didn’t actually happen but help to explain observable natural phenomena. It is difficult to imagine, for example, that in Tolkien’s universe the Sun and Moon are actually vessels containing the last essence of the Trees of Valinor that are being pushed across the sky by lesser angelic spirits. However, whether we determine these stories as purely metaphorical or an actual representation of reality depends on the frame through which we view it. Within the context of the story universe itself it is not possible to view them as anything other than reality, however as a part of the relationship between our reality and the story universe it is certainly meant as metaphor.
Tolkien set out to create a whole mythological history for England. This included a creation story as well as various individual mythological stories. Tolkien acknowledges in Letter 153 that “the whole matter from beginning to end is mainly concerned with the relation of Creation to making and sub-creation (and subsidiarily with the related matter of ‘mortality’), and it must be clear that references to these things are not casual, but fundamental: they may well be fundamentally ‘wrong’ from the point of view of Reality (external reality). But they cannot be wrong inside this imaginary world, since that is how it is made.” The entire story of the Valar is tied up in the relationship of Creation and sub-creation, as well as the very nature of morality within the universe. Illuvatar is the only being with the authority to create. Melkor is “evil” because he wants to create for himself and be the lord of that which he creates instead of sub-creating for the glory of Illuvatar as the rest of the Valar do. This leads him to jealousy and to destroy that which the other Valar do. Thus, the entire story of creation, as a very clear reference to the relationship between Creation and sub-creation, “cannot be wrong inside this imaginary world.” This means that though it may not be literal from the view of external reality, it cannot be wrong from the view of those inside the universe because the entire story was made as a coherent whole discussing the relationship of Creation to sub-creation.
It is easy to draw parallels between the mythological history within the Silmarillion and other creation stories or myths such as Genesis or Greek mythology, and that is of course by design. The relationship between modern society and those mythologies is such that (by most people) they’re viewed as metaphor, and in the same way the creation story within Tolkien’s universe is metaphorical in relation to our society. However, within the context of their own universes, those stories are reality. We can clearly state that Frodo and Sam taking the Ring to Mordor probably didn’t literally happen, just as we can say that Adam and Eve eating the Forbidden Fruit or Hercules battling the Hydra probably didn’t literally happen. However within the universe of those stories, the divine beings, creation stories, etc have to be regarded as literal history. The Valar and the history of the First Age cannot be simply metaphorical because they directly impact events that take place within The Lord of the Rings. Galadriel met the Valar and was present during the First Age, and she plays a role during the Third Age. Elrond’s father was Earendil. The Fellowship encounters a Balrog. These things would not be possible if the Valar and the First Age were simply metaphorical. If the Valar were not real Galadriel could have told people so. There would be no place for Maiar such as Gandalf and Sauron if we write off the existence of Valar and Maiar. Within the universe of the story as it exists during the events of the War of the Ring, they must have been literal history, in the same way that in the story of Genesis the story of creation was literal history to the characters within it or in the story of Hercules the Greek pantheon were literal history to its characters.
The contrast between reality in the universe of the story and reality as it relates to our ‘real’ world gets at the very nature of the relationship between Creation and sub-creation that Tolkien explores throughout his writing. His belief is that God created our real universe, and that he is a creation of God. His act of creating this imaginary universe is an act of sub-creation, in which he is able to create a fully coherent history that does not necessary have to be right from the perspective of us within the primary universe. It can be metaphorical to us, but literal to the characters within the story.