The smoke diamond is one of the four Diamonds of Azzanadra which must be obtained during the Desert Treasure quest. It is obtained by defeating Fareed in the smoke dungeon.
It is recommended that players deposit this gem on the bank as soon as they obtain it, along with the other Diamonds of Azzanadra, as a level 95 stranger may appear and attack them if they are holding one of them. The more diamonds you have on you, the more likely the stranger will appear and attack you.
Should the player lose the diamond or want to collect another via drop trick, entering the gated area, where Fareed was fought, will spawn another. To keep a copy of the diamond after the quest, drop a duplicate before putting the last Diamond of Azzanadra into the pyramid's final unpowered obelisk and it will be safely kept afterwards, even upon quest completion.