I don't have my books with me, but did Gandalf look into the Palantir? Saruman did, so Sauron knew about the Istari, and it follows that the Witch King would too, it being a rather significant piece of information. His contempt of Gandalf may have been arrogance of his power AND state, after all, he was called the Witch King and was a great sorcerer when he was a man. If he could hold Gandlaf in contempt this way, then he wouldn't have blinked at Eowyn had she not stood up to him.
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-Halbarad to Aragorn, 'The Passing of the Grey Company' Book V, Return of the King."A little people, but of great worth are the Shire-folk. Little do they know of our long labour for the safekeeping of their borders, and yet I grudge it not"
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