On my system, anything in the gemhome field in .gemrc seems to render
Gems unusable. Here's some output for your viewing pleasure:

# Version
05:45:46 ruerue@purr> ruby -v
ruby 1.8.2 (2004-12-25) [i686-linux]

05:51:28 ruerue@purr> gem --version
0.8.6

# This is what I'd like to have
05:51:35 ruerue@purr> cat .gemrc
gem: --gen-rdoc --run-tests
rdoc: --all --line-numbers --inline-source
gemhome: /home/ruerue/lib/ruby
gempath:
   - /usr/lib/ruby/site_ruby/1.8/rubygems

# But then this happens
05:51:55 ruerue@purr> gem install -r og
Attempting remote installation of 'og'
/usr/lib/ruby/site_ruby/1.8/rubygems.rb:131:in `activate':  (Gem::LoadError)
Could not find RubyGem sources (> 0.0.0)
         from /usr/lib/ruby/site_ruby/1.8/rubygems.rb:34:in `require_gem'
         # Backtrace snipped

# I can change it to the default location, but to no avail
05:57:54 ruerue@purr> nano -w .gemrc

06:00:36 ruerue@purr> cat .gemrc
gem: --gen-rdoc --run-tests
rdoc: --all --line-numbers --inline-source
gemhome: /usr/lib/ruby/site_ruby/1.8/rubygems
gempath:
   - /usr/lib/ruby/site_ruby/1.8/rubygems

06:00:39 ruerue@purr> gem install -r og
Attempting remote installation of 'og'
/usr/lib/ruby/site_ruby/1.8/rubygems.rb:131:in `activate':  (Gem::LoadError)
Could not find RubyGem sources (> 0.0.0)
         from /usr/lib/ruby/site_ruby/1.8/rubygems.rb:34:in `require_gem'
         # ...

# Removing it works, though
06:00:48 ruerue@purr> nano -w .gemrc

06:04:11 ruerue@purr> cat .gemrc
gem: --gen-rdoc --run-tests
rdoc: --all --line-numbers --inline-source
gempath:
   - /usr/lib/ruby/site_ruby/1.8/rubygems

06:04:15 ruerue@purr> gem install -r og
Attempting remote installation of 'og'
Install required dependency extensions? [Yn]