Ferromagnetic particles in the putty are strongly attracted to the magnet and very slowly engulf the surface of the magnet. The magnet shown in the picture is a strong neodymium iron boron magnet. It's a very powerful magnet for its size and could erase magnetic stripes found in credit cards and damage electronics!
The putty looks and feels like regular silly putty, but the difference lies in the fact that it has been infused with millions of micron-sized ferrous particles (most often iron oxide powder). The magnetic putty is not actually magnetic by itself, since the infused particles are made of iron powder.
The presence of the strong neodymium iron boron magnet (the silver cube in the video) magnetizes the ferromagnetic particles in the putty. When this happens, the ferrous particles align with each other and this alignment generates north and south magnetic poles, making the putty into a temporary magnet. Once magnetized, the putty will remain magnetized even after the rare-earth magnet has been removed from the putty."
[source: Magnetic Putty Time Lapse 1080p]
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