Let the pro's answer, but my two cents.

1. old-style cloth insulation. It's fine if left alone, though the older it gets, the worse it looks. Kinda like me.

2. Go with the (electron) flow.

3. I wouldn't cover the ground. Your house is probably wired with 2-conductor wiring, ie, no ground wire. Fine for old stuff. Get your flashlight and look into the box for a hole that you could insert a ground screw. YOu can get self-tapping ground screws at the big box store. Otherwise I might wrap the ground wire around one of the mounting screws and tighten it down.

Thanks!

When we cut a bit of wire at the end you could see it was copper 'inside'. But good tip for buffing!

So we are being super careful not to disturb the cloth insulation. My husband thinks the new wiring/light fixture and the old cloth wiring might be different gauges... is this a problem?

The gauge is fine, I'm sure.

A concern may be what the new fixture temperature rating may be. Some fixtures may require "90c" wire (that's wires that can handle 90 degrees Celsius). Wiring as old as yours is probably only rated for 60c.

I'm not positive, but the 90c requirement may be mainly for flush mounted incandescent fixtures but check your new fixture's requirements. These types of lights produce a lot of heat around the box and the older wiring's insulation can't handle (ie. it becomes brittle and falls off).

Another consideration about what greg is talking about is the flush mounted lights are rated for incandescent (since they could be used) which put off significantly more heat compared to today's LEDs. Typically fixtures have a warning saying either 40w max or 60w max for the bulb. It is not due to electric max capacity, but the safe heat that the fixture can handle from an incandescent.

So, LEDs would not heat up the fixture or the wires above it as much.

Lets look at some LED heat outputs, specifically their heat sink which is always hotter than the bulb. https://www.lifx.com/blogs/the-latest/19032975-how-hot-are-led-light-bulbs You will see that LED heatsinks still put out a good amount of heat, around 86C (186F), those are the 9w leds which are 60w equivalent. If you scroll down further you will see another picture with various lights, and the 60w incandescent puts out 181C (357F). So an LED is about half the heat.

Thanks! I checked our new light and couldn't see any mention of a 90c requirement, so hopefully it's OK. It's this one from IKEA http://www.ikea.com/ca/en/catalog/products/00176042/

We will be using LEDs with it.

The insulation on that wire is rubber with braided cloth over it. The braid was used to protect the rubber from abrasion. The wire is most likely type R. It was standard for knob and tube wiring in the first half of the 20th century, A similar or identical wire was also used in early BX and NM cable.

The conductors in this cable aren't aluminum. IIRC aluminum was sometimes used even then in service entrance cable (also used for ranges), but in those sizes, it was always stranded. If the wire is solid, it absolutely is NOT aluminum.

Aluminum solid conductors in #12 and #10 was a 1960s and 1970s era disaster. You won't find it with a rubber and cloth covering.

It's silvery looking because it's tinned copper, meaning that the copper is coated with solder (lead/tin alloy). This was done so the rubber wouldn't stick to the copper or corrode it (the rubber contained sulfur), and also to make soldering the wire easier (splices were usually soldered in those days).

Trivia: splices in type R were supposed to be insulated with material equivalent to the insulation on the wires. So you didn't use our modern plastic electrical tape. You soldered your splice, taped it with gummy rubber tape (the layers stuck together and eventually fused), and then taped over that with cloth tape called friction tape.

This is where one possible problem for you enters.

As Greg points out, type R was rated 60 deg C. The later type RH was rated 75 deg C. I don't know of any way to tell them apart, so I always assume that any cloth-covered rubber wire is 60 degree wire.

The problem arises where fixture or luminare instructions call for connecting only to 90 deg C wire. You're actually supposed to rewire the box if you don't have 90 deg wire in it.

Unlike the old incandescents, which were/are basically electric space heaters with light as a byproduct, many modern LED and compact fluorescent luminaires don't actually seem to produce that level of heat. I don't know why they're labeled for 90 deg C wire. Maybe someone else knows.

Now for grounding.

Knob and tube and early NM don't provide a ground. I'm not sure, but I don't think that's what you have there.

I'd have to see your box in person, but it looks to me like you have either conduit or BX coming into that box. If it's one of these, there's a good chance the box is grounded (a test light will tell you). However, if it's BX, the ground may not be safe.

If it's conduit, you can ground your luminaire by drilling the box and tapping it for a 10-32 green grounding screw. I used to use grounding clips like these back in the day, but I don't know whether code allows them now. Besides, they were a bit of a pain to put on.

If you don't have conduit, I'd just coil up the luminaire ground wire, tape it for insulation, and stuff it up into the box.