The most common and most likely answer to this crossword clue is the 8 plus 5 letter word MAGNETIC NORTH
I've seen this crossword clue in The Times
M
A
G
N
E
T
I
C
N
O
R
T
H
Buddy explains!
The straight part
We know that "that needle points to" is the straight/definition part of the clue. The straight part is often a synonym or definition, in this case that needle points to = magnetic north.The cryptic/wordplay part
In cryptic crossword there's often an wordplay/cryptic part as well.This part involves a more complex hint, such as an anagram, homophone, hidden word, etc.
Sadly, We don't have an explanation for this specific crossword clue yet.