Sounds to me like someone didn't have their latte that morning! Ha ha.
But seriously, we do have to acknowledge that just as not all adults like the social hugging/kissing thing, they may not want their kids to be approached by another stranger's child who does the same to their child. Some people are just not touchy-feely. Also, in the wake of H1N1, people may be a little more "personal-space" conscious. And there are those with weak or compromised immune systems, or even those who have been fighting illness in their homes and can't stand the thought of one more cold/flu (even if you know your child is healthy)!
However, children are prone to be naturally affectionate, and that lack of self-consciousness is adorable (and leaves them all too soon, sadly). I get a kick out of seeing my little 4 yo grab the hand of her best friend and go skipping away - it's a spontaneous gesture that warms my heart. People are too quick to make deviant what is truly innocent behavior in children of that age.
Perhaps the best thing to do, as has been mentioned, is to reserve the physical expressions of affection for those people with whom you are acquainted, not those whom you are just meeting, unless you first ask the parent's permission. The woman who announced your son's lack of being taught personal space was being tacky. She may have felt offended, but she could have addressed you personally by saying they aren't that affectionate with strangers.
Regarding adult strangers, you may want to make it clear to your son that speaking to someone while Mommy is there is fine, but (what I asked my daughter to do was) to check with Mommy first before striking up a conversation. We ended up having quite a discussion about it, but I would rather deal with that in private and beforehand than once she's chatting up Charles Manson, lol. I really liked the Green/Yellow/Red rating idea, and that can be done in a discreet manner, decided between the two of you beforehand.
Cherish your loving and affectionate son. Let him know that there is nothing wrong with these expressions, rather, as with most things, there are appropriate circumstances and groups best suited for them. :)