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Colored Diamonds are naturally found in the Earth's crust. Diamonds get their color from various variables like the presence of nitrogen can impart yellow or orange shades to a diamond, the presence of boron will impart a blue shade to a diamond ranging from deep blue to sky blue, the presence of hydrogen produces unique violet hues. Tremendous pressure exerted on a diamond deep under the earth can abnormally compress its structure, thus creating a red, pink, purple or brown stone. Natural radiation impacting already formed diamonds over millions of years can give them a green hue.
There are two types of colored diamonds. Natural colored diamonds are found in the earths crust and are the most rare and precious stones known to man. There are also treated / irradiated diamonds that are real diamonds, but go through a process that changes their color from white to the desired color. These have less value, but can be an economically sound alternative.
Colored Diamonds occur from impurities in the chemical makeup and bonding of a diamond. These special colored diamonds can be produced naturally, or synthetically. The value of a colored diamond is dependent on the vividness of the diamond. I found some good explanations of determining the value of a fancy colored diamond here.
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