It took me some time to figure it out where the gems are installed on my ubuntu 7.04 linux machine so I thought I would save it here as a reminder. The ruby gems are stored here:
What I did to find this is to run gem install without sudo to see the error message:
me@desktop:/usr/lib/ruby/1.8$ gem install rails
Bulk updating Gem source index for: http://gems.rubyforge.org
ERROR: While executing gem ... (Errno::EACCES)
Permission denied - /var/lib/gems/1.8/cache/rails-1.2.3.gem
The permission denied message gave me my answer. Who said error messages are not educational?