Basically you use сивий for things that are grayish, silverish, whitish, especially hair, animal fur and feather.
In figurative sense it means very old: сива давнина - a period of time that was long long ago, сива історія - very old story. You don't use it for real "objects", though
Yes. In fact, you can use it without the word «воло́сся», then it would mean 'gray-haired': Мій дідусь сивий 'My grandpa is grey-haired'.