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When using the Dremel, make sure it's rotating away from the edge. If you want a mirror finish, you'll have to go at least as high as 2000 grit.. For that you have 2 options..
1) Jason (Toxik) has a...

If you want to remove those scratches, you'll need to resurface the blade.
Hand-sanding takes forever, so you might want to consider using your dremel. After that, you can use radial bristle discs...