Q:Why does Prince Charles have a coloured knob?
A: He kept sticking it in Di.
My informant, who grew up in the 80s, was lucky enough to be around when Prince Charles and Princess Di were still alive and well. Thus, when this joke began to circulate, one could guess that even though it’s fairly tasteless, it was still somewhat acceptable. Now it has become even more tasteless and bordering on insulting since the princess’s death. That doesn’t stop anyone from laughing at it though. These Princesss Di jokes have definitely died down in the past few years, with much of the new generation not even sure who Princess Di was. Thus, this joke is generally only used when in a specific age range.
Mechanicaly speaking, the metaphor is a simple play on words with Di replacing dye.