I think this is one of those songs that SN heard/read the name Melacine (probably from the story mentioned earlier in this thread) and then wrote a song about it a la Annabel Lee. In fact she has repeatedly said that that is how her songs that are titled with names come into being. She hears a name like Rhiannon, etc., and then writes a song about it. Having said that and rather scarily (sp?) Rhiannon was written before she knew the legend. Imagine if the same was true about Melacine.
I think this demo could have been a hit with a little FM/LB or even JI magic.
Also, my impression was SN jokingly said she was a witch in that 1998 interview in a tingue in cheek Q&A session.
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