Well to explain this properly allow me to start off with what it is in reality, and then as a second part what the VOCALOID meaning of the song is so you get a better understanding:
Kagome Kagome (also known as Kakome Kakome/Circle You, Circle You) is based off of a children's game played by small children in Japan. To play, a child is chosen as an oni (demon) but it the equivilant to "it" in the commonly known game of Tag. The child who was chosen as it sits in the middle of a circle with their eyes blindfolded and others who are playing circle around them and sing/chant the chorus of the song and move around. Once they are done, the person in the center must say the name of the person who is behind them. If they get it right, the person behind them trades places. If not, the person in the middle stays there until they can guess right. Here's one of many translated versions from the original Japanese format into English:
Kagome kagome, the bird in the cage,
when will you come out?
In the evening of the dawn,
the crane and turtle slipped.
Who stands right behind you now? )
"Kagome" = the person in the middle who is seen as a captured bird.
"Cage" = Those who are circling around the "it" person and singing.
"Crane and turtle slipped, who stands behind you right now?" = Very twisted way of saying "Who is about to stab you in the back?"
For more information, please check the Wikipedia link I left in the sources. :)
Now, we all know our beloved VOCALOID's enjoy to sickly twist things for horror songs, here's what the storyline appears to be:
In an abandoned orphanage in the woods is a small group of forgotten/abandoned children. It looks like the watcher of the video comes across it and the children want to play the game mentioned above. The chorus is what is chanted as the children go around in a circle and the question is asked who is behind whoever is in the center, and if you answer incorrectly the VOCA's will kill you or chop off a limb. It's then shown that what looks like to be scientists (or those who ran the orphanage) played with them, and even if the child in the center guessed correctly they would have something cut off which just happened to be a head in the video for the reason of wanting the child's blood (?).
"In an orphanage in a deep forest,
by a forbidden technique,
from young children's brain,
a wonder elixir of immortality can be made."
According to those lyrics I would assume blood but I honestly have no idea what they could be talking about otherwise. When it gets down to these lyrics (again in English)
"Even with their limbs torn or heads crushed,
the children will not die,
but simply smile innocently."
It leads me to believe the VOCALOID children are already dead and therefore can't die a second time, and are haunting the place and chopping off limbs/killing anyone who comes into the abandoned orphanage.
This is simply my take on it, and in no way am I saying it's correct but I did my research. xD Anyways, hope I helped. :)
VOCALOID fan, and I usually like to know the storyline/meaning myself.
Learning the Japanese language as well as about their culture so I knew about some of this already