Can I hide the "All on My iPhone" option in iPhone's Contacts app?
Unless you manually go to that "All on My iPhone" section and add a contact, contacts would be created by default on the account you're viewing, i.e. Gmail. Just keep the Contacts app viewing only the Gmail contact list and you should be fine.

iOS5 now has a Default Account option under Settings > Mail, Contacts, Calendars > Contacts (section) (Credit to Peter for the update)