Actually, this doesn't seem to be strictly Rails. I hit the same issue doing a:
$ gem unpack file-tail ERROR: While executing gem ... (ArgumentError) install directory "file-tail-0.1.3" not absolute
I know that I did this before updating to rubygems-0.9.1
-Rob
Rob Biedenharn http://agileconsultingllc.com Rob@AgileConsultingLLC.com