"nothing stopping a Spanish resident driving a foreign registered car in Spain that is owned by someone else and in Spain legally"
Well, that depends: I cannot drive my sister-in-law's UK reg car, even in the UK, because her insurance company won't accept me as a named driver because I'm not a UK resident and don't have a UK licence. Before you shoot me down, I'm not quoting Tony's law here, just stating a fact of her specific insurance policy. So, by extension, I cannot drive her car in Spain if she brings it over here on holiday.
"which at the end of the day rejects the blanket statement "a Spanish resident cannot drive a foreign regsitered car in Spain" - this is INCORRECT information."
OK, so being pedantic, it may be true there are exceptions to the "blanket" statement, but the reply John got from the UK police, which as you rightly say is not answering the question asked, proves that even the authorities are confused by the issue. But the gist of it is correct in most circumstances, and all this point proving (and talk of caravans) doesn't really help the OP, does it?
She has never registered as a resident, but clearly her legal status is that of resident. So clearly she should re-register her UK plated car in Spain. However, as long as he is covered on the insurance, I can see no legal reason why her BF can't drive it here. Of course, once he becomes resident himself, if he gets stopped he's going to have to explain that it's not his car, that it belongs to his GF, and hope that they don't deduce that she's a resident!
Really, this is like the argument over whether or not you have to exchange your UK licence for a Spanish one. Everybody has their own opinion (especially Tony) but at the end of the day, why make life harder for yourself? Staying indefinitely? Register as a foreign resident; change your licence; re-register your car (or buy a Spanish plated car); sleep at night. Simples!