I suppose Sauron assumed that the Witch-King would be strong enough to overcome Gondor, with not only his great fighting power, but his power of fear over the Gondorians. So with the King of the Nazgul in charge of the most important battle, he could then divert his remaining forces to other places (i.e. Erebor), even though some places like Lothlorien could not be penetrated by mere orcs alone.
Sauron underestimated the strength of the Men of Gondor, and he did not take into account Aragorn taking over the Corsair ships. He thought that he did not need a large number to break through Gondor's gates and the terror of the Witch-King would be enough and he was right- partially. What must be noted is that the force Sauron used in the siege of Gondor was
not small by any means, and still far outnumbered the forces of the Gondorians. So, as you said, Angry Hill Troll, the point in that quote you gave was to show just how many troops Sauron had under his command.
As always, it is the underestimation of an army that has been the downfall (or at least, the partial downfall) to the 'bad guys'. Morgoth underestimated the forces of the Elves in the Nirnaeth and 'as for the valour of Men, Morgoth took no account of as yet' (or something to that effect); Sauron underestimated the valour of the defenders of Gondor, he didn't think that Aragorn would take his Corsair ships, and he certainly did not think that his great commander would be defeated-
Quote:
'He is watching. He sees and hears much. His Nazgul are still aborad. They passed over this field ere the sunrise, though few of the weary and sleeping were aware of them. He studies the signs: the Sword that robbed him of his treasure re-made; the winds of fortune turning in our favour, and the defeat unlooked-for of his first assault; the fall of his great Captain.' (The Last Debate; Book 5- Chapter IX)
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Saruman also underestimated the Ents and look what they did to him. An interesting thing in this quote is about the Nazgul "being abroad", no doubt commanding Sauron's
other forces, being his most trusted servants. Alternatively, Sauron's 'greatest' army could have been held back in Mordor, for the time when Sauron himself was ready to come out and challenge the West (which he could do only with the Ring).
Quote:
Here in the northward regions were the mines and forges, and the musterings of the long-planned war; and here the Dark Power, moving its armies like pieces on a board, was gathering them together.
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So here we can see that Sauron was amassing his forces in Mordor, ready for the last, greatest assault on Gondor to destroy it utterly. However, this didn't happen, as Sauron's armies were defeated, as was his greatest Commander. Thus, the bulk of Sauron's forces were most likely gathered in Mordor itself, in readiness to destroy Gondor and the other free lands entirely.