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Because the Earth has a Magnetic filed - with magnetic poles at roughly the same places as the geographic North and South poles, a freely suspended magnet will tend to orient to point in the direction of those magnetic poles. Also - because the magnetic poles exist - when natural forces cause iron to liquefy, there is tendency for it to align with the magnetic field of the earth - creating the famous "lodestones" that were sometimes used by ancient mariners to create compasses.

Note that lodestones are not pure iron, rather they are magnetite - Iron(II,III) oxide)

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