Although this might be valid in MS Word, this will approach will not in Aspose.Words.
Since that you mentioned it, I now realize it might have worked in Aspose.Words before 4.0. If you want a brief explanation, it is related to the work we've done in Aspose.Words 4.0 to improve graphics. We did not anticipate INCLUDEPICTURE field used in this way and therefore it will not work this way.
A more detailed explanation: Aspose.Words 4.0 had a major upgrade of how drawing objects are handled and INCLUDEPICTURE fields in the document are now represented by a Shape object. Basically, when you load such a document into Aspose.Words, it will have a Shape object with image source set to text "MERGEFIELD blah blah". MERGEFIELD will not be a field and therefore will not be picked up by the Aspose.Words mail merge engine.
I will log this as a thing to consider, maybe we will rever how INCLUDEPICTURE fields are handled, but cannot promise at this stage.
To workaround, remove the INCLUDEPICTURE field, leave the MERGEFIELD and change the field name from GraphLink to Image:GraphLink. This is an "extended syntax" that Aspose.Words mail merge engine understands and it will try to load an image and insert instead of the merge field.