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Strange but true. The exchange option is the way to go.For some reason it is not possible if you add Gmail through the standard setup (i.e. selecting Gmail from the list in the wizard). If you add Gmail as an "Exchange" account it works.
See: http://lifehacker.com/5859854/how-to-set-up-gmail-google-calendar-and-google-contacts-on-ios
Strange but true. The exchange option is the way to go.