You would think it this process is straight forward but it appears there were changes that prevent simple update but here are the steps:

1. Update to 1.3.0:

$> sudo gem install rubygems-update -v 1.3.0
...
 
$> sudo update_rubygems
...

2. Update to the most recent release

$> sudo gem update --system
...

3. Check the version

$> gem --version
1.3.5

That’s it.