Problem with outdated RubyGems

Error :

Rails requires RubyGems >= 1.3.1 (you have 1.2.0). Please `gem update –system` and try again .

Fix :

As it is clear from the error message, updating the RubyGems will resolve this issue.
Reinstall the ruby gems using the following commands:

gem install rubygems-update
update_rubygems