Yesterday gem 1.2.0 was released. This is a release we've all been waiting for! This version doesn't have the 'bulkupdate' and doesn't consume that much memory as before. So update your gem for the last time with the -B parameter. Like this:

gem update --system -B 1000000

Before version 1.2.0 I had to do on my VPS:

gem install -B 1000000 --no-rdoc --no-ri rails

But now I can do:

gem install --no-rdoc --no-ri rails

And it's finished in a sec!