What causes name to turn grey? It seems to be related to inactivity, but activity doesn't turn it back to black (including: switch windows, click screen, use menu functions, preview game). Sometimes when I just watch my friend's game silently (and vice versa) name turns grey and this leads me to thinking that they're just doing something else.

Wouldn't it be better to have user typed away message for grey text?
/away /afk
/back /bk

For me, inactivity for a few minutes causes a name to turn grey, and activity (such as you described) turns it back again. I've never noticed it not working.

it just means that there was no "activity forced by the user himself" for some time as loading someones profile, join and watch another game, writing something in a channel.
It turns black again if you do something like one of the things mentioned above. (Easiest is just profile-loading)

and grey doesn't really mean they don't look your game anymore, often it's be the opposite (they just look, so no custom reaction from your client -> their name turns grey)

Only typing and submitting text turns it back to black.

Actually, anything that sends data to the server turns it black. Switching windows, clicking on things, etc. happens all in the client so it doesn't need to send any kind of request to the server. Looking at a user's profile, opening an ongoing game, playing a move, typing something, clicking on the "I'm still here" thing in the "you've been inactive for 10 minutes" warning box, joining a new room, and probably several other things do send data/requests from your client to the server and reset the inactivity thing.

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KGS 4 kyu - Game Archive - Keyboard Otaku

nami and fwiffo explained it well. Your name turns grey after 10 minutes of inactivity.

I see now. Thanks.