Cloth is not shielding, it's insulation. Insulation is to protect electrical conductors (wires, etc.) from contact with other conductors. Shielding is to protect from radiation. Noise from a guitar comes from electromagnetic radiation inducing currents in the conductors. Don't need to touch the conductors, they merely need to be in the presence of the radiation to have electrical current induced to flow. That current gets amplified and turned into sound, which is generally undesirable in audio circuits.
Some folks will shield the cavities all the conductors are inside of with copper or aluminum foil. This is mildly effective, but the vast majority of noise is picked up by the pickups. In the case of "humbuckers", there are some schemes designed in to cancel the noise out, so they're relatively quiet. This can't be done with single coils, so they're typically very noisy. Much more so than what gets picked up in the loose wiring of the control cavities.
If you're using humbucking pickups, most of the noise is going to come from the control wiring, so it needs to be shielded. Best way to do that is with shielded cable, which is a type of wire where the current we're interested in is carried by a wire that's surrounded by and insulated from a conductive covering that's tied to ground. The covering picks up the radiation and dumps it to ground, so the signal wire inside never sees it. Guitar ends up quiet.