That's one of the reasons, why it was a great decision/sacrifice, and not foolish. They don't need morale now, but a sober assessment of reality. Gazeff is well know to be the strongest they have. A lot of people (many of them actual fools with political clout) who weren't present at that battle, won't understand what happened there easily. Gazeff knows the sort of fools they are. They may believe the reports are greatly exaggerated, "there must have been some devious trap", etc... whatever is more convenient for a fool to believe.
And you already saw it, how lightly they took this threat before, despite the information they had of him casually killing an elite army equipped with so many angels while taking no injury himself - yet how seriously did they take that report? But at least they will know that their strongest died in a duel, which a simple and easy to understand fact.
If he was still alive, he may become a beacon of hope, but that's not always a good thing, especially in the current situation. That beacon of (false) hope can be a beacon of calls for revenge too, a reason to not accept your defeat. Because he is dead, there will be far less of that, and more accepting of the reality of their situation.
Of course as others mentioned, there where other benefits, such as stalling for time to retreat. This is a man who died willingly for his country, to minimize the damage to it as much as possible. There was no more effective means available to him than this, to lose his own life in this place. He did very well, with only a single life.
