I oberved that the ENTIRE FC cabin was occupied by coach fare paying gold members (at least no silvers). All of them were on Y (AU) fares (approximately $531 one way).

You think that CO's upgrade policy is a problem. So, what are the alternatives to CO's upgrade policy.
1. We could just eliminate the upgrade policy for Y fares completely. This may cause some comment both from elite members now no longer able to upgrade their full fare Y tickets (remember the "enhancement" threads of several years ago?). Furthermore, would you get more upgrades for other elites due to the elimination of this perk? I doubt it. Those persons willing to fork over a full Y fare will hardly be deterred by the extra $100 that CO currently tacks on to buy its standard A fare over the Y fare. And as noted elsewhere, some discounted F fares are actually lower than the full Y fare. Finally, why would CO shoot itself in the foot financially by making its full fare product less valuable than its discounted product. By eliminating Y up, the only thing that differentiates a Y fare from an X is refundability. That is not much of a perk for an extra 5 to 6 hundred dollars. Thus, I suspect CO would sell fewer Y tickets and get less revenue for each flight. The above does not sound like a win win situation for either CO or its elite passengers.
2. CO could modify the upgrade policy. But how would they do that? Would a Plat elite flying on a T fare trump the Gold on a Y fare. Is it fair (fare??) for a Silver paying $900 for a Y fare to wait behind a Plat paying $199. I cannot say but it is apparent that CO does not believe that is the case. Is that right or wrong, who knows? We could argue forever about it, but these are the rules that CO have set into place. If we don't like them, we always have the right to move our business elsewhere.

I think the basic problem is that CO has provided a product (First Class) that lots of people are willing to buy at the current prices. CO could eliminate this "problem" by raising the price to the point where people would feel that the product doesn't justify the cost, thereby opening up first class seats to more upgrades (good for us, not for them). Or, they could downgrade the product to, say, the level of US Air. No one really wants to spend the money for that, so you do get seats available for upgrade. I think that would be bad for both CO and us. The rule that I work under is simple. If I want to fly in the front I have to pay for it. I do not expect when flying discounted Y to be upgraded.