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The grey cat reflects the surroundings, the neighborhood in which Jim and Della live - "a grey cat walking a grey fence in a grey backyard." O. Henry is painting a word picture of the environment, which is colorless and drab, and of their situation in life. Jim and Della don't have much in the way of color or excitement in their lives due to the financial state of their household. They live in a small and very inexpensive apartment, probably in a less-than-desirable location. Grey is the color that best describes much of their existence - not the black of complete hopelessness and despair, but no concrete reason to see anything better anytime soon.
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