Make a directory for gem installation:
$> mkdir ~/.gems
Set up your .gemrc for gem install-time configuration:
$> cat << EOF > ~/.gemrc
Set up some environment variables for run-time:
$> cat << EOF >> ~/.bashrc
Source your bashrc and you're all set.
UPDATE (Apr 18, 2009): gem seems to do this on its own now, so just adding
to your .bash_profile should be enough.