Compasses are some of the oldest navigational tools in history. A compass works by detecting the Earth's natural magnetic fields. The Earth has an iron core that is part liquid and part solid crystal due to gravitational pressure.
Essentially, a compass is a lightweight magnet, generally a magnetized needle, on a free rotating pivot. This allows the needle to better react to nearby magnetic fields.
Since opposites attract, the southern pole of the needle is attracted to the Earth's natural magnetic North pole.
Source: {http://www.universetoday.com/77072/how-does-a-compass-work/}
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