I had installed ruby 1.8.7 from MacPorts and was also getting this
error.  After downloading RubyGems and running setup.rb, things worked
as expected.  I, of course, had to reinstall my gems since the new
RubyGems (/opt/local/bin/gem) keeps its gems in a different spot than
the gem that comes with Leopard (/usr/bin/gem).

All this is a little new to me but this is how I got it to work.

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