On the Navy technique, that's used to check preheat for welding where approximately room temp (60F) minimum preheat is required. The source of the moisture is really the water vapor as result of burning a hydrocarbon fuel (acetylene, propane etc.). The basic combustion products are H20 and CO2 always. Once the metal heats up the water vapor no longer condenses, and yes there is a lot of water that will condense. Try your propane torch on a cold piece of material and you'll see.
Hi Mark, That looks great! Every time I see a '12, my hinder parts hurt, 'cause I kick myself for selling mine all those years ago. Maybe you can post some video footage of your '12 project. Hey, does the coil box cover have a little dos and don'ts instruction pasted inside it? Mine had one, and the funniest don't was something like "don't dissect the magneto we put the right number of little wheels in it to start with"