Actually, that sounds right. The zone of silence you found is called the zero beat.
Here comes the technical stuff - the theremin sound is produced by a "beat frequency oscillator". There are two radio frequency oscillators in it, one producing a waveform of a fixed frequency, and one producing a waveform that varies as you move closer to and further from the pitch rod. The audible sound of the theremin is the difference in frequency between these two radio frequency oscillators.
When they are both the same frequency the difference is zero. Silence.
When there is a very small difference between them you get a very low note. As the difference between them increases - as you move away from the zero beat in either direction - the note you hear increases in pitch.
Turning the pitch knob "tunes" one of the oscillators, just as you would tune a radio, moving the zero beat zone closer to or further away from the pitch rod, giving you a way to control the spacing between the notes.
(This is a simplification. I have put a more detailed, non-technical description of the theremin playing fields in a little pamphlet I wrote last year - here http://tinyurl.com/beatfreqbook. See the first chapter - "The Instrument". Note that purchase is optional, the "preview" link leads to a complete online copy.)