do you mean a gyro-compass? it points to geographic north. as for how it works…
the earth rotates from west to east. if you let it move freely, a gyroscope will remain in its orientation due to its rotational inertia. to someone standing next to the gyroscope, this would look like the gyroscope was rotating very slowly, once per day.
when you push on a gyroscope, you cause it to undergo *precession* and point itself perpendicular (at a right angle) to the force applied. by attaching a carefully balanced weight to the gyroscope, gravity will apply a torque to the compass (toward the center of the earth) which will nudge the gyroscope to align itself north/south.
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