Your friend is only slightly correct. In the Inquisition time they used to use homosexuals as extra kindling in witch burnings along with faggots (sticks for burning). However, it doesn't mean that gay people should burn or anything. In fact, I don't find the word offensive. I'm only annoyed when a person spams it in a debate, etc.

So tell your friend that a gay person just said that he isn't offended by the term "Fag".