TOC, first I'd like to say I'm impressed with your reasoning and step-by-step breakdown of things. If I weren’t a Buffy the Vampire Slayer fan, or a fan of the supernatural type in general, I'd probably have a lot of the same questions and problems accepting elements of Shayne's story as well.
But, as a Buffy fan I've noticed that you and several others are having trouble with parts of the story... parts that were integral in the Buffy the Vampire Slayer television show, which are in fact canon of the show, and are only being used by Shayne, not created. Some of the questions and conjecture have actually made me wince :p I'll do my best to explain.
The government cover-up ties into "The Initiative," a secret military operation that took place in Sunnydale (well, actually, in an facility underground UC Sunnydale). To Buffy and the Scoobies (Buffy and friends nicknamed themselves The Scoobies in reference to Scooby Doo and the Scooby Gang solving mysteries) The Initiative seemed at first a well-meaning government operation to fight demons; they later learned that experiments involving demons were taking place. Most notably the big evil of the fourth season was Adam, a Frankenstein-type conglomeration of demon (note: there are many other demons besides vampires), human, and computer. He turned on his creators and wished to create more of his kind. Adam was eventually defeated by Buffy and her friends, with the use of a spell that brought her friends powers into Buffy's body.
The Initiative was a secret operation. The general public was kept unaware. As for demons, vampires, magic... who would believe someone when they said it was real? It almost seems like a learned mindset for the town to ignore everything and to explain death by BBQ fork or wild animal attacks because they're more likely than being attacked by such a ludicrous thing as a vampire. As for government involvement of demons... well, the former Mayor of Sunnydale was technically a demon, one that ascended into full demon form before being blown up in a "gas leak" at the high school graduation (note: the Scoobies planted lots, and lots, and lots of explosives to make the big snake go boom).
Magic. In BTVS, Magic is real. You can do almost anything with magic, but there are rules. The rules, as they've been touched upon in the show, are similar to physics. Magic is energy, it can neither be created nor destroyed, but it can be harnessed.
The guys in chainmail are the Knights of Byzantium. They were fist introduced in Buffy during season five, in the episode, "Checkpoint." They're a military order made of up knights and clerics. They're the enemies of Glorificus, a Hell-God thrust out of her dimension by fellow Hell-Gods and into our dimension and bound to the body of a newborn male. She remained completely repressed, but over time her strength grew and she was able to assert her control over her host's body from time to time (for Stargate fans, it would be rather similar to an immature Goa'uld talking control, except that when Glory takes control the host body morphs into a female form). The Knights seemingly have existed throughout the ages, passing on their ideals but living in modern times. As for the medieval weapons, it's been noted in the series that most modern weapons (i.e.: guns) will only piss off a demon and cause some pain. Most can recover easily from a gunshot wound, but decapitation will kill most everything dead as a doornail. A few exceptions in the show were the explosion of the high school to kill a giant snake demon, and a grenade launcher used to kill a demon known as "The Judge," whom "whom no weapon forged by man could kill." The only problem with that was that The Judge didn't originally exist when things like rocket launchers existed. His body exploded into several parts, but should they ever be reunited again he would become whole again (and alive).
The Knights came to Sunnydale seeking to destroy what Glory sought: The Key. The Key is literally a key to dimensions, a mystical ball of energy that can rip open dimensional barriers. Glory needed the Key to open a gateway back to her home dimension. The guardians of the Key are an order of monks, known as the Monks of Dagon. They've protected the key for millennia, but as Glory began her search for it they felt the need to send it to someone who could better protect it, namely, The Slayer. They gave the Key human form, thereby binding it's power, and used magic to created false memories of Dawn, Buffy Summers (The Slayer) younger sister. The body created for the Key was about twelve years old and the first twelve years of her "life" were false memories implanted into everyone.
The Knights of Byzantium, knowing that Glory had begun searching for the Key swore to destroy it before she could harness it's power. To destroy the key meant that they had to kill Dawn. Buffy and the Scoobies were unable to continually fight the onslaught of the Knights and Glory's minions who were searching for the Key, and decided (Buffy and company) to make a run for it. They were ambushed on a dessert road and holed up in an abandoned gas station for protection. The Knights laid siege to the station, but due to a shielding Spell performed by Willow Rosenburg (the witch of the group) they were able to hold them off, that is until Glory arrived.
Glory decimated the Knights. Glory, similar to Clark, is invulnerable for the most part, though not entirely. It's her fingernail that's found in the skull of the Knight. She single-handedly massacred dozens of medievally armed men. Which leads you to the mass grave of men in chainmail.
I'm sleepy and in a bit of an allergy fog, so I'm gonna come back to this tomorrow and see if I missed anything... I hope my explanations may help anyone who's having some trouble.
