I think all he meant was that "e" is found in the word blue and the word "grey" for the riddle purpose.
It can be spelled either way, by the way:
Main Entry: gray
Variant(s): also grey /'grA/
Function: adjective (From Merriam-Webster online)
(Is there a full moon in the Cellar?)
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A word to the wise ain't necessary - it's the stupid ones who need the advice.
--Bill Cosby
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