This option serves to specify the library path, where the linker looks for static or dynamic libraries. {$LIBRARYPATH XXX} will add XXX to the library path. XXX can contain one or more paths, separated by semicolons or colons.
For example:
{$LIBRARYPATH /usr/X11/lib;/usr/local/lib}
{$LINKLIB X11}
will add the directories /usr/X11/lib and /usr/local/lib to the linker library path. The linker will look for the library libX11.so in both these directories, and use the first found file. This directive is equivalent to the -Fl command line switch.
Caution is in order when using this directive: If you distribute files, the locations of the libraries may not be the same as on your machine; moreover, the directory structure may be different. In general it would be fair to say that you should avoid using this directive. If you are not sure, it is better practice to use makefiles and makefile variables.