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It appears the problem is with setting the GEM_PATH when using Leopard Ruby. The export on line 6 does not need quotations around the path.
With quoatations:
[~] echo $GEM_PATH ~/.gem/ruby/1.8:/Library/Ruby/Gems/1.8:/System/Library/Frameworks/Ruby.framework/Versions/1.8/usr/lib/ruby/gems/1.8
Without quotations:
[~] echo $GEM_PATH /Users/geoffrey/.gem/ruby/1.8:/Library/Ruby/Gems/1.8:/System/Library/Frameworks/Ruby.framework/Versions/1.8/usr/lib/ruby/gems/1.8
Somehow this is causing the mysterious '~' folders.