You are trying to run Ruby on Rails on OS X, and all you ever get is
Rails requires RubyGems >= 0.9.4. Please install RubyGems and try again: http://rubygems.rubyforge.org
When you check gem --version you find that you already have RubyGems 1.1.1, or some other version higher than 0.9.4 that Rails ought to be happy with.
At some point you installed MacPorts. MacPorts built and/or installed a redundant version of ruby, even though you didn’t ask it to.
To confirm that this is the problem, type which ruby and see if the answer has /opt in it. If so, yes, MacPorts hosed your Rails/RubyGems. Solution: sudo port uninstall ruby
(I’m pretty confident that MacPorts is at fault here because I installed it for the first time this evening to build bzr, which involves no Ruby, and indeed is from a bunch of Python programmers who would probably sooner drink raw sewage than require Ruby for anything. So thanks, MacPorts.)