This is a fairly predominant trait with GSDs. It seems more of an inbred pre-disposition, ie. herding instinct, than simply a bad habit. Some people relish it and take it as an indication of their dog's undying devotion and love, others simply tolerate it as if there is nothing they can do about it. Chances are good, she is trying to protect you from Buddy and vice versa. Nonetheless, it is a habit that is causing you grief. You wouldn't tolerate it with a child and you don't have to with your GSD.
I never mind a certain amount of it but when it becomes irritating to me I just order, "Go lay down."
I've always found my GSDs to be incredibly sensitive to tone of voice. My military and LEO training made me aware of a command voice, I definitely believe it works with GSDs. It's been my experience that women have a harder time commanding an action from a dog, choosing rather to request one. The idea that you are going to "warp their little psyches" by ordering them to do something is misplaced, I believe. It goes with the whole Alpha thing, my dogs have always known I was the boss. And just as with children, "Because I said so." is a perfectly legitimate reason.
To paraphrase the old saw, "If Mama aint happy, ain't nobody happy!" Nobody wants to be around a boss when he or she is in a bad mood. Make her think you are in a bad mood.
Since you're being distracted by her anyway, you might as well use the opportunity for sit/stay obedience drills if you can't bring yourself to shout, "Get the **** out of here."
GSDs, or any dog for that matter, will do anything they want unless they are prohibited from doing it. It's basically a matter of what you are willing to tolerate. Just like some owners like to rough house with their dog and encourage him to jump up and put their paws on their chests and then wonder why they knocked the kid or the little old lady down.
" She is very gentle and I am sure she is just appreciative to be with us,"
I think you're assigning human reasoning and behaviour to an animal. If that was the case, looks like she could just send a card, or maybe a nice potted plant!!:<)