Gold and silver coins are the perfect physical companion to bitcoins.  They have many desirable characteristics in common.

While I agree that a smartcard would be better, it's not an issue of technological superiority, it's an issue of adoptability. Every merchant on the planet already has a card reader and most have some kind of customer-facing terminal that, with the right software, could simply be modified to process BTC without requiring expensive new hardware (and trust me it's expensive).

Edit: Also, I wasn't complaining about the network access, I was complaining about the currently available solutions for holding the keys necessary to actually spend/receive money. If only people with smartphones get to participate in BTC transactions out there in the real world, that's too small a percentage of the total populous.

I think physical bitcoins is a silly idea ...but it keeps coming up over and over.  There are already plenty of options for physical money...fiat notes, fiat currencies as well as gold and silver coins.  Smartphones with net access are rapidly becoming ubiquitous, so the need for a physical manifestation of a currency in order to exchange is rapidly diminishing.  And for bitcoins, it's even worse than fiat bills...the opportunity for counterfeiting physical manifestations of bitcoins where network access is unavailable is quite large...and if you have network access, then you really don't have a need for a physical manifestation of bitcoins.  On the contrary, it's far more difficult to counterfeit national currencies or gold or silver.  I would never trust a card with an amount of bitcoins printed on its face without being able to connect to the network and complete the transfer into my wallet.  I would far prefer cash or precious metals in that circumstance.

Now, a problem that might be useful to solve is the scenario where one person involved in a transaction does not carry a connected device.  A smart USB key or a smart card that could be used for decrypting private keys and signing transactions would be useful (taking great care that the unencrypted private keys never leave the card).  A pin code would be required to activate the software on the card.  And, using asymmetric crypto you could probably even do this in such a way that if you ever lost physical possession of the card, you could easily revoke the ability for that card to access your private bitcoin keys (even if someone key-logged your pin code on a terminal of some sort).  One open question would be how to prevent malicious software running on a terminal from surreptitiously telling the card to create other transactions than the one you intend to create.  The only way I can imagine doing that is by creating some kind of well known and highly tamper resistance device designed to do nothing more than let you enter your pin code and confirm spend transactions (I imagine something like a smartphone with a touch screen, but branded and well known to be tamper resistant)..this device could then connect to a variety of other devices (either wired or wirelessly) that do the more complex job of connecting to the bitcoin network, etc.

Of course, the more likely scenario is that we continue to use cards very similar to what is used today, the only difference being that they are connected to accounts backed with bitcoins instead of fiat currency.  It would be up to the issuer to design a scheme that keeps access to your account secure (something like what I describe above could just as well be used for accessing an account).  Imagine mtgox offering a debit card that, when used, would draw on your balance of national currency and once exhausted, would then automatically initiate market sell orders to raise the needed national currency for a transaction.  If you do not have enough bitcoins or there are not enough open bids to generate the needed currency, the transaction would be denied.

Why would anyone accept a physical coin from you that you can revoke?

A Bitcoin debit system like this (http://www.reddit.com/r/Bitcoin/comments/him0f/bitcoin_debit_co/) is a lot better than BitBills.

(http://forum.bitcoin.org/index.php?topic=10716.msg153663#msg153663) related post about this from this forum

Honestly from a security standpoint this wouldn't be as difficult as most people seem to imagine. Those terminals you swipe your credit card on at the grocery store do 99% of the processing themselves. There is a server in a back room that handles a little formatting and communication, but if you enter a PIN number for example, the PIN is 3DES encrypted before it ever leaves the device. These devices have layer upon layer of security and it's quite hard to get anything like a keylogger into one of them. In some cases the devices are designed to physically destroy vital components if you so much as open the case. Side note: the little glass capsules full of nasty chemicals are pretty easy to break so sometimes picking up a pinpad and slamming it on the counter is enough to pop them and destroy it.

Long story short I'm not talking about a software-on-pc solution where the merchant actually handles your keys, I'm talking about an embedded device solution where your keys are placed in a temporary wallet (held in RAM never stored) and used to send a payment once only. Even if we were talking software-on-PC or software-on-smartphone as long as the IDs were never stored on disk the threat is still negligible. The biggest threat to a system like this would be keylogging and I've got a suggestion for that too.

When you use a debit card and enter a PIN, the PIN is 3DES encrypted before ever leaving the pinpad. This encrypted PIN block is sent to your bank along with the rest of the transaction information where it is decrypted and compared. The key used for the encryption is specific to each pinpad and changes with each use. We could create a solution where the private key is never stored on the card at all but is instead held by some intermediate institution, similar to a bank. In this case the public key combined with the encrypted PIN serve to identify your "account" and they send the BTC on your behalf when they receive an authenticated request.

Of course to maintain the distributed nature of bitcoin there would need to be a large number of these "banks" which, given the release of the banking software into public domain, would be devastatingly simple to achieve. In theory you could even install the banking software on your home PC and be your own bank if so inclined. Think of it like MyBitcoin or MtGox except that they're connected to the major payment processors.