Thanks for the info about GEM_HOME.  I set up /usr/local/bin
to be ahead of /usr/bin.  I still have trouble getting the gems
to be loaded with the newer /usr/local/bin/ruby

Here's my setup now:
/usr/local/bin/ruby              # latest ruby
/usr/lib/ruby/gems/1.8/gems/     # gems

Do I set:
GEM_HOME=/usr/lib/ruby/gems
or
GEM_HOME=/usr/lib/ruby/gems/1.8/gems

Also, it's not clear to what values to use for "user directory"
and the "mygemrepository" in the following (taken from the RubyGems
man page: http://rubygems.org/read/chapter/3)

    Use the following to install RubyGems in a user directory
    (here called /home/mystuff)
    with a repository named /home/mygemrepository):

    $ export GEM_HOME=/home/mygemrepository
    $ ruby setup.rb config --prefix=/home/mystuff
    $ ruby setup.rb setup
    $ ruby setup.rb install

At the moment, I don't need RUBYOPT because I use
require 'rubygems'