All you need is a 12/3 cable from the existing switch box to the new switch box. Should not be a problem since the walls are open. Do not mess with any wiring at the fixture. Only the two wires on the old switch need to be used. Take one of the wires from the old switch and connect to black in new cable. Take other wire and connect to COMMON screw of new 3 way switch. Take red and white from new cable and connect to two remaining traveler screws on new 3 way. At new switch. Connect black to the COMMON screw. Connect red and white from to two remaining traveler screws on new 3 way. Connect all grounds together and to green ground screws on switches. This is what you will be creating. http://www.selfhelpandmore.com/switch-outlet/3-way/3-way-wiring-power-fixture.php

From the 2nd switch you only need two conductors, a hot and a neutral, going to the light. The hot will come from the "common" terminal on the switch. No reason to replace the cable, just leave the 3rd wire disconnected. Whomever wired it to begin with probably either had extra 14/3 around, or wanted flexibility, for example to power a fan and a light separately.

And I'd like to add one other thing to my overall question. So the entire knob and tube run is pristine. Very good condition, very nice Everywhere I can see it running (through part of the ceiling joist cavity in an open frame construction). I'm just going to leave it alone because I can't get new Romex up there. But our kitchen is attached to the backside of our foursquare house and as a result there is actually an extension off of the home that extends the kitchen out a little bit further. It was original and since it was original there's no insulation in the ceiling. The lighting fixture as well as the entire three-way switch loop is all completely in open uninsulated cavities which are compliant even according to the latest NEC. However we would like to be able to put insulation into the other section where there is just a hip roof above the ceiling. When the ceiling is up there will be no access which I know is a parameter in the code. I know that you cannot run knob and tube around insulation or have insulation over it even though in some states apparently there is a waiver. So I'd like to try to figure out a workaround again since I cannot rewire the connections to the fixture with romex what choice do I have? Is it possible to at minimum install conduit above the insulation with a new single neutral wire that connects to the knob and tube in two places? In other words just replace one section of the existing run so that it is protected from insulation that we would want to put up there? Optimally I would relocate the neutral and shorten its length, but cannot do that due to the restrictions of splicing in romex. There will be no other loads on the neutral because I will be re-wiring all of the others with new Romax from the basement. It's only this one stupid lighting load on this three-way switch. Thanks for your guidance!

Wiring diagram seems ok if it's as you say. Cause could be that one of the switches has an internal stuck contact between a 'common' and a 'traveler'. To confirm, first shut off the power. Disconnect both travelers at one of the switches. With an ohmmeter, see if the connection between common and each traveler can be switched off. If both can be shut off, check the other switch (don't have to undo it because it's undone at the other end.) The one with a line that can't be shut off is a bad switch.