Traditionally, if something real has been selected as a direct exchange for a unit of "money", then it was something that wasn't too easy to get, usually, but that people either needed or at least wanted. This explains why people don't use sand for money. Or grass. Or shit. ;-) It's too easy to find, and nobody much wants it.

You could definitely use water for units of money in a desert area, and it would work great. People in many parts of the ancient world used salt as money for the same reason...it was hard for them to get salt, and they needed it in their diet for health reasons. There was a huge trade in salt at that time, and caravans brought it from places like the Dead Sea to areas where the people could not easily obtain it.

The reasons people generally like gold and silver...as opposed to mud, grass, shit, flies, ordinary common stones, etc. are so obvious that there's no need explaining them.

People also like diamonds and other gemstones because they are rather rare and hard to get (And the diamond industry makes sure it stays that way!) and they look beautiful when polished. They may not be "useful", but they look lovely, and that is a use in itself. Even crows will steal shiny objects like that and put them in their nests, so it is not human beings alone who appreciate a supposedly "useless" item merely for its appearance.

Life is not a matter of "utility" or physical suvival alone! It also has an aesthetic side that is quite important in establising happiness in people. As soon as people have the survival part reasonably well in hand (at least for the moment), they start giving plenty of thought to all kinds of other values in life. Things like gold and silver jewellry help satisfy some of those other values.

There is a inner desire for perfection that drives people, and it goes way beyond just surviving. It gives us our concepts of beauty, grace, dignity, style, purity, and most of the other subtle values that make life worth living.