A diamond for the cover for the display would be ridiculously expensive. It wouldn't be good to use that and expect people to buy it.
What's interesting is that there are ways to strengthen glass with PVD ion process, which is what they are using for the non-Sapphire models on the watches and phones. It's not common knowledge, but it's quite possible that maybe they can strengthen Saphire with this process as well?
I'm sure they will be using the PVD with gold sputtering process since it only uses a very small amount of gold, the thickness is only about 2 microns thick and it's a LOT cheaper than traditional gold plating, and it's a LOT stronger of a bond which makes it more durable. Apple can also do various types of bronze finishes, black chrome, various colors, rainbow coating, etc. with PVD coating technologies.
If Apple uses PVD sputtered gold, the price difference might not be that much, so this $1200 sounds more like speculation rather than reality.
Obviously, stainless steel is more expensive than aluminum and it's more expensive to fabricate, so the material and labor is more expensive. So I don't know how Apple is going to price these watches due to sapphire, stainless steel and gold plating and strap options.