I can confirm that the yellow wire in question is live/hot. I'm almost positive that its the switch because. . .
The switch has 2 channels, switch sits in 3 positions, top-chan#1 middle-chan#1+#2 bottom-chan#2.
bridge pup is chan #2 (default) and chan #1 is neck (default) If I unsolder the hot wire's from the switch I can play both pups individually via channel #1 via the switch, but neither pup will play via channel #2. Both will play when wired direct to the jack.
Going back your comment about its a fender style wiring, would that make a difference in sound? I have no problem re-wiring and I would very much enjoy doing it. But, I'm not one for doing things for the sake of it. I am very new to guitar wiring though I can handle electronics fairly well, when working from schematics.
For what I've read it can make a difference to the sound of the style played, as I have a strat type already I was hoping for something to play metal/rock types.
What would you guy recommend?
You can check the switch pretty simply with the multimeter, hold one side on the ground, and the other on the channel 2 lug, then flip the switch back and forth. If you get connectivity in all 3 positions, it's the switch. It sounds like it is, though. Try a new one.
The difference between gibson/fender wiring is purely a style thing I think, as in it makes no difference, it's probably just due to which way was more intuitive for the engineer(or whoever) designed the circuit in the first place.
I just said that because I've only seen the capacitor hooked up like that in a Fender, that is with it between lug 2 on the tone and ground, with lug 3 hanging out and lug 1 going to hot. In a Gibson, the cap goes from lug 3 on the volume to lug 2 on the tone, and then lug 1 on the tone is grounded. I don't think that there's a tonal difference, I just prefer the Gibson wiring on a stacked potentiometer(since the volume and tone are close together, and it saves space on the back of the pot), and the Fender wiring when you have normal pots because stretching a capacitor across the control cavity is kind of silly and just gives you a higher chance of having the leads ground out on something.
It might have something to do with the fact that Gibson started out using those big paper-in-oil axial capacitors(with one lead on one end and the other on the other end), which would make it hard to solder from the lug to the back of the pot. I think Fender changed the way they wired it when they started using ceramic caps, because they're easier to solder to the back than between pots(because the leads are on the same side).
Now both manufacturers use ceramic caps though, so it's kind of silly for Gibson to keep wiring it the old way, except to make it easier for people who want to put PIO caps in.
Do it whichever way makes more sense in your case. The value/type of capacitor matters more than the way the pot is wired in ever could. Once you get it working, you might try some different values just for grins to see what you like. The type doesn't matter so much, but there is some difference. I was skeptical, but I've tried a few different types of caps and I like the ceramic or PIO the best. I replaced the ceramic in my LP with an orange drop and it sucked. It sounded muddy when turned down instead of just more bassy. It could just be the tolerances though, they're pretty wide for most tone caps for guitars.
Sorry for my lengthy posts, haha.