This ad sounds a little bit like a very popular one we looked at a few months back — then, it was for $1 “Silver Shots”, and it was a teaser for a leveraged derivative trade on silver futures (or, in plainer speak, it was for long-term call options on the SLV ETF).

If you invested in those so-called “silver shots” when I wrote about them, you would have seen your investment come close to doubling, then fall apart. I estimated that Zachary Scheidt back then was teasing January 2010 SLV call options at about a dollar, they were $1.15 when I wrote about it and are now about 55 cents thanks to the decline in silver prices and the time decay on the options. If you were to try a similar strategy now you might look at the $15 strike price for a bit under a dollar, or, for a somewhat larger speculation, the January 2011 options. That’s not a recommendation, of course, just an update.

But that’s not what we’re talking about today — what’s being teased is a different way to invest in silver, something else you can buy for a very low price if you believe silver prices will spike, without the same kind of “bet it all” leverage that you get with one of those options trades.

And this tease is for the Retirement Millionaire newsletter, which is an interesting letter from Dr. David Eifrig that doesn’t necessarily focus on investing all the time — he writes about finding special deals and freebies and living well in retirement. You may have seen his ads before, it’s published by Stansberry so it gets quite a bit of exposure.

Today he’s teasing two things: First is the cheap silver that I noted above, second is the “Free Retirement Loan from the U.S. Government”. To take the second thing first, I can tell you that the “free retirement loan” must be the same thing that we’ve seen teased by several newsletters before, taking social security early, banking those payments, then repaying them after a few years to “reset” your social security for a higher payout — it does end up being an “interest-free loan” as far as I can tell, but of course, you also have to be in a position where you’re taking the money but you don’t necessarily need it, and there are lots of details that I don’t know about. I wrote about this last Fall, so you can see the details and the long discussion here.

So now, the point of our note today, dear friends — silver and gold have been on a bit of a recovery slope in recent days, so what is this “U.S. Government Backed Silver for $1.25?”

What could this be? The letter includes a nice, long argument that the price of silver will spike in the years to come, and that it will outpace any gains from gold. The rationale is the same stuff we’ve probably all seen before: Silver is “real money” and should rise with inflation; unlike gold, it has real uses as well and is largely consumed by industry, including healthcare and lots of new electrical and green technologies that demand silver; government stockpiles are either gone or historically very low, and silver coin demand has spiked to remarkable levels; there are a limited number of “primary silver” mines and it doesn’t get the same mining attention as gold; and silver is historically very cheap right now relative to gold (that’s the “gold/silver ratio” that you’ll probably hear a lot about as long as it’s below historical averages).

So if you buy all that (and many people do), what’s the way to play silver here?

Here’s the spiel to get us going …

“Created by and Courtesy of the U.S. Government…

“Well, you could buy silver stocks.

“But, mining and silver stocks depend on a lot of variables beyond the price or even fundamentals of silver itself.

“You could buy into a silver ETF, but no one can say with any certainty how reliable this will be as prices take off. After all, they are fairly new investments and have no real track record.

“You could buy ordinary bullion, but you’ll need to pay 25% OVER the price of silver to buy these investments.

“You could buy newly minted silver coins, but expect to pay premiums of 30% or more.

“In fact, I just looked up a newly minted 1 oz Silver Eagle Coin on E-bay. They are selling for $21.95… that’s a 50% premium above the current price of silver.

“That’s why I believe the absolute best way to buy real silver is through a U.S. government-created vehicle that will act as a store of value and give you a chance to own real silver and reap a hundred, even thousands of percent gains… for as little as $1.25.”

So, that’s interesing, no? How about some more specific clues?

“The U.S. government ceased production of this silver in 1965 because people were hoarding it and not circulating like the government had planned.

“Since that time, it has quietly changed hands from one investor to another and no one knows for certain how much is available.

“There are 3 unique properties of this U.S. government – backed Silver that make it such an ideal investment:

* “This silver is widely recognized and therefore liquid. It has always had an eager market for owners who want to sell it.

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* “It is easily divisible should you need to “cash-in” a portion of your investment or use it to buy goods and services in the future.

* “It is already “pre-certified” and should not need independent verification of purity and value like silver bars, silver rounds, or collectible grade coins… because every piece of silver is date-stamped and has official U.S. Government markings.

“As I mentioned, you can buy this silver investment in very small increments (for as little as $1.25). You’ll basically pay the “spot” price, which you can find quoted in many places on the internet… plus 2% to 4%. (Remember… most silver bullion you buy will have a mark-up as much as 10-times higher.)

“And best of all, because you are getting this silver cheaper than most any other silver investment, you’re opportunity for gain is that much greater.

“A small $500 stake today could realistically turn into $2,345 over the next several years.”

So, that’s enough for the Thinkolator to pipe in with an answer — and if you’re a silver investor or coin collector, it’s probably enough for you to have the answer at hand as well. This is …

Junk silver.

Junk? Who wants junk? That’s the term that’s used for circulated currency, often in terrible shape, from before 1965, when the silver content of U.S. coins was cut drastically. Coins from that era — quarters, dimes, half dollars and dollars, particularly, are prized for their silver content even if they’ve been clobbered and beaten up and are almost unrecognizable as coins.

And for good reason — through 1964, U.S. quarters, dimes, half-dollars and dollars were minted in 90% silver — and their size at the time was perfectly proportional, with the currency value reflecting their silver content, so five dimes has the same silver content as two quarters or as one half-dollar … the silver didn’t just back the money, it was the money. I don’t know why, but this doesn’t apply to nickels — as you might note, they’re a lot bigger than dimes and contain no silver (with the exception of the war years, when they had a lower silver content), maybe the original size had some relation to the historical value of the nickel in the coins, not sure, but they should not be included in any “junk silver” finds. Nor should pennies, of course, since they never included any silver.

So why “junk silver?” Junk silver has been hoarded ever since the coins were taken out of production, people started using the new, 1965 and later coins that had little intrinsic value, and saving the silver coins. You can still find them in your pocket change every now and then, and if you find your dad’s old coin jar in a box in the attic it’s probably full of 90% silver coins, but for the most part what we’re talking about here is not scavenging silver, but buying junk silver as a way of getting silver cheap.

How does it work? Coin dealers will sell you bags of junk silver, or sometimes rolls of the old silver coins — these are almost always priced based on their silver melt value, since the coins are usually extremely used and worn. They do theoretically all have the “US Government Markings” that were teased, like the date and the denomination, but those are often unreadable on junk coins after being circulated for a decade or more and then jostled around in a bag for 40 years. And they are still legal tender, so they can’t ever be worth less than a quarter or a dime, but of course the silver content is far more valuable than their face value and, one imagines, it probably will always be so.

What does the $1.25 mean? Well, it’s hard to tell exactly what the value was when this letter was written, but at the current price of about $13.60 a 1964 Roosevelt dime is worth about 98 cents if you melt it down for the silver, and that’s the smallest silver coin you can buy (in U.S. currency, at least), so that’s probably what they’re referring to. You can typically buy these for a dollar on ebay or from a dealer, perhaps a hair more since coins that are sold individually are probably in better shape.

And as I said, the values increase in step with the currency — so a quarter from 1964 or the decades before is worth just under $2.50, a half-dollar is worth a little less than $5 at current silver prices. Dollars almost always get a premium over other junk silver coins, so you’re unlikely to see them in junk bags that might be sold for investment.

Oh, and though we always talk about “melt value” for junk silver coins, as far as I know it’s still against the rules to melt U.S. currency — this rule has changed several times in history under different regulatory changes from the Treasury, but the last time they came out on this was 2006, when they specifically targeted the melting of nickels and pennies, since copper and nickel prices during the commodity surge meant that both were worth much more melted down than their face value, and they feared hoarding and mass melting and export of coins. So don’t go start the barbecue and smelt your own bars in the backyard on my account.

For folks who are interested in investing in bulk junk silver coins, the key number to remember is .715 — the standard calculation is that each dollar of this 1964 and earlier coinage contains .715 ounces of silver (they were minted with .723 ounces, but .715 is a standard assumption to take account of the level of wear on circulated coins).

Junk coins from dealers are often sound in bags based on their currency value, so you’ll see bags of $10, $100, $500, $1000 — a $10 bag includes 7.15 ounces of silver, a $100 bag 71.5 ounces, etc.

It used to be that you could typically buy these junks silver coins at a significant discount to the melt value — but that was silver enthusiasm was low, and like anything else when interest climbs, premiums follow, so today you will almost always pay at least a few percentage points above the melt value, as the teaser states.

Of course, you pay a premium for almost any kind of silver these days — U.S. Silver Eagles trade at ridiculous premiums these days, but even generic silver rounds and bars typically trade at a premium. You can use ebay to get an idea of what some folks are willing to pay, though premiums are often higher there, or check out any of the major dealers to see what it would cost you to buy physical silver.

As I check now, I see 100 oz bars of silver available from reputable mints, like Sunshine or Johnson & Mathey, selling for 60-80 cents over spot per ounce from big dealers. That doesn’t sound like a whole lot, but silver is at $13.60 so that’s in the neighborhood of a 5% premium over spot prices. The same general premium holds for other really generic lots of silver, like bags of silver shot, and smaller sized rounds or bars generally have slightly higher premiums.

Junk silver bags, I’m afraid, almost always trade at … pretty much the same premium right now. I only checked a few of the more aggressively advertised dealers, but the prices they were quoting were about the same, premiums of 60-70 cents per ounce for even a $1,000 face value bag (which will cost you between $10,200 and $10,500 for 715 ounces of silver).

So you may well find bargains out there, and you might decide, for whatever reason, that you’d rather hold old US coins with melt value instead of already refined pure silver, but the prices are, for relatively large purchases, pretty similar — the attention that junk silver has gotten in recent years has not been good for people looking for cheap silver investments, I’m afraid.

One thing is certain, though: If you see a pre-1965 coin, don’t put it in the vending machine. And as a final note, please do double check all of the numbers I’ve used above — I’m pretty sure they were accurate, typos notwithstanding, when I typed them, but these things change quickly.

What do you think? Are you interested in buying physical silver, and if so, do you prefer junk silver, bars, coins, or something else? Or do you think that the SLV ETF is a fine way to go with a smaller premium … or those “silver shot” ETF options or a silver miner for a more leveraged or speculative play? Or are you convinced that buying silver of any flavor is silly today? Let us know what you think with a comment below.

full disclosure: I own shares of some silver miners as a speculation, and Johnson & Mathey silver bars and U.S. Silver Eagle coins, among some other silver bullion, as part of my long-term savings. I won’t trade in any mentioned investment for at least three days.