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There are a couple questions here. Will it retain its magnetism? Can I add the powder to the iron powder currently in my "magnetic" silly putty to make it truly magnetic? And finally, how best do I crush it? The magnet that came with the putty has chipped so I'm willing to sacrifice it in the name of recreational science.

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I can't find a definitive link, but Google for Neodymium toxicity gives lots of hits. Best not to use Neodymium powder without expert advice, perhaps. –  Peter Morgan Jan 31 '12 at 20:15
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up vote 2 down vote accepted

When you crush the magnet it just becomes smaller pieces of magnet, so I believe the individual granules should still retain their magnetism. However, the directions of the poles of the magnet granules when put would be just cancel each other out... (because they are in a mess in your powder form with some granules having poles pointing one direction, another some other direction) so your silly putty would not become truly magnetic.

(I believe...)

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I think I have heard that the powder loses the magnetism as neodymium magnets tend to oxidize rather fast but I have to confirm this. Usually the bulk magnets are protected by some surface finish. –  Alexander Jan 31 '12 at 19:44
    
I would think the attraction between granules would cause them to align - assuming they are close enough together to overcome friction. If so, I would also expect them to clump together into a ball over time. –  Matt Chambers Jan 31 '12 at 22:15
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